The Nasdaq Composite Index needed 31 months to plunge 78 per cent after the Internet bubble burst in 2000. Climbing out of the hole took more than 12 years.
Led by a 132-fold increase in Apple Inc. and a 13-fold jump in Google Inc., stocks in the gauge on Thursday cleared the record 5,048 threshold that taunted investors for 15 years as a symbol of dot-com excess. The Nasdaq has advanced more than 350 per cent since bottoming in October 2002 after the slump erased about $6-trillion (U.S.) from American equity prices.
Six years into a rally that began at the depths of another crisis, money managers say technology stocks are safer now than they were a decade and a half ago. The biggest difference is valuation. While the Nasdaq 100 Index trades for about 24 times full-year earnings today, too few of its members had profits even to calculate a ratio in 2000.
"That was a totally different environment," said Jim Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees $338-billion. "We had sentiment that was through the roof and we thought we had reached the new era and forever more, it'd be different. You were valuing companies on clicks not on earnings, and I don't sense any environment close to that today."
Owing partly to the ascent of earnings behemoths such as Apple and Google and partly to a reluctance to take money-losing startups public, technology profits are on sounder footing. Information technology firms earned $194-billion from continuing operations in 2014, about 19 per cent of the S&P 500 whole, compared with $67-billion in 2000, or 13 per cent, data compiled by S&P Dow Jones Indices show.
The list of Nasdaq 100 companies then and now highlights changes that swept a technology landscape that in 2000 was weighted toward money-losing telecom startups. Eight of the top 20 no longer exist as standalone public firms, including WorldCom Inc., Sun Microsystems Inc. and Global Crossing Ltd.
While the three largest weightings of March 2000 -- Microsoft Corp., Cisco Systems Inc., and Intel Corp. -- remain in the top 10 today, Apple, now the world's most valuable company, didn't even make the 30 biggest back then. Today's No. 3, Google, was four years from going public, and No. 4, Facebook Inc., didn't exist at the height of dot-com mania.
Nine straight quarterly rallies have lifted the Nasdaq Composite 67 per cent since the start of 2013, making it the last of the three main U.S. equity benchmarks to reach records since the bull market began. The Standard & Poor's 500 Index and Dow Jones Industrial Average got there in March 2013.
It's a feat that has yet to be matched by shares in eight of the 46 biggest national markets tracked by Bloomberg, with equities from Thailand to France, Taiwan and Italy hovering below records reached in 2000 or before.
"People have confidence the economy is in a stable area," Pat Becker, a fund manager who helps oversee $3.3-billion at Becker Capital Management in Portland, Oregon, said by phone. "It's tough to find growth out there so investors are attracted to the Nasdaq because for the most part, it does contain growth companies."
Computer and software stocks, while generating the S&P 500's highest earnings and fastest profit growth, are nowhere near as dominant as they were in the 1990s in terms of return. During the last six years of the dot-com bubble, the S&P 500 Information Technology index leaped 968 per cent, three times as much as its nearest competitor, health-care.
Since the bull market began in 2009, it's posted the fourth-biggest gain, rising 257 per cent, compared with 291 per cent for banks and brokerages and 383 per cent for a group of newspaper publishers, store operators and carmakers. Relative to earnings, tech stocks are in the middle, with a price-earnings ratio of 19.6. Consumer and health-care stocks are valued higher.
"In 2000, technology was the only area investors were interested in," said Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion. "The new issue market was boiling hot. Price-to-earnings ratios didn't matter. Everyone had felt that technology had cured the business cycle."
More than 880 companies went public on the Nasdaq in 1999 and 2000, compared with 315 over the last two years, data from Nasdaq OMX Group Inc. show. The dot-com bubble was marked by unprofitable Internet companies selling shares for the first time, such as Pets.com Inc. and online grocer Webvan Group Inc.
Few of those survived with their identities intact. Of 40 members of the Dow Jones Internet Composite Index in March 2000, only nine still trade under the same name. Gone are the likes of Webvan, eToys Inc. and Lycos Inc. The biggest weighting, America Online Inc., survives as AOL Inc., with a market capitalization of about $3-billion.
These days, companies going public are older, larger and selling at lower valuations. Businesses backed by venture- capital or private-equity firms were on average 12 years old in 2013 when they went public, compared with four years during the dot-com era, according to data compiled by Jay Ritter, a finance professor at the University of Florida. They were priced at a median of 5.2 times sales, versus 30 times in 2000, the study shows.
Some parts of the market are sturdier than others. After surging 533 per cent since March 2009, the Nasdaq Biotechnology Index's price-sales ratio has risen to an 11-year high of 10. About two-thirds of the index's 148 companies are forecast to be unprofitable this year, analysts' estimates compiled by Bloomberg show.
Among the biggest social media companies, Twitter Inc. trades at 142 times forecast earnings, while Facebook has a multiple of 39.
"The market is interested in growth and is willing to pay a premium," John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion, said by phone. "But I don't know if that suggests a market peak. It's not as worrisome to me as the trend in the late 90s."
SBA Communications Corp., Monster Beverage Corp., Priceline Group Inc. and Apple are among eight Nasdaq 100 stocks that have soared at least 10-fold since the Internet crash ended in October 2002. Apple has contributed the most to the gauge's advance, with its weighting rising to 15 percent from about 1 per cent.
Even with the record retaken, investors aren't piling in. They've pulled $2.5-billion from technology-focused exchange- traded funds this year, data compiled by Bloomberg show. PowerShares QQQ Trust, the biggest ETF tracking the Nasdaq 100, has lost $2.7-billion.
"The stocks now are being valued on a much more rational basis relative to the days of speculative, Internet-driven stocks," Jim Russell, who helps manage about $13 billion as a Cincinnati-based portfolio manager at Bahl & Gaynor Inc., said by phone. "The Internet was a new thing and many companies either participated fully or were involved to some degree in the build-out or provided the on-ramp to get there. The valuations on those companies simply got too high. That is not the case today."