A look back at the tech boom 15 years ago shows just how crazy Wall Street was over tech stocks.
SAN JOSE, Calif. — Welcome back to the nosebleed section.
After its spectacular belly flop during the dot-com bust of 2000, the tech-laden Nasdaq on Monday crossed the 5,000 mark.
The number at the closing bell — 5,008 — speaks volumes about the tech boom under way, and the yeoman’s job that a few giants like Apple have done to carry the momentum forward. It also is about just how insane things were the last time the Nasdaq reached this pinnacle.
“The reason it’s taken so long to get back to where it was is that it was so ridiculously overpriced to begin with,” says Frank Jones, a finance professor at San Jose State University who spent 23 years working on Wall Street. “It was the herd mentality back in 2000. It was a mania.”
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The index, which is made up of more than 3,000 stocks including Microsoft and Amazon, took its time reaching its record high. While the Dow and S&P 500 have been chalking up one record after another, the Nasdaq has gradually plodded along.
“Fifteen years is an awfully long time between an index hitting one high and then hitting another. So instead of saying the market must now be overvalued again, I say, wow, it’s been a long time coming,” says John Shoven, director of the Stanford Institute for Economic Policy Research.
In that regard, the Nasdaq’s record underscores just how disconnected from economic reality that things were back during the dot-com days, a time when companies were going public without showing revenues much less profits and startups like Pets.com and Webvan were going down in flames.
Beacon Economics founding partner Chris Thornberg says: “There was all kinds of craziness back in the late ’90s, with companies spending all sorts of money putting systems into place without a clue of what it all meant. By comparison, companies today are making money hand over fist and investing it in R&D. This time, they’re being smart with their money.”
Thornberg and others point to a reluctance among entrepreneurs and their venture-capital investors to take a company public without a proven business model.
Today’s price-to-earnings ratios for the largest companies listed on the Nasdaq hover in the midteens, numbers that seem downright dowdy compared with over-100 figures hit by Cisco, Oracle, AOL and Yahoo during the dot-com boom. That’s significant because the metric, which theoretically tells us how much investors are willing to pay per dollar of earnings, has historically averaged between 15 and 25.
When the doomsday naysayers point to companies like Uber as an example of a super-inflated startup economy that’s a bubble in the making, Menlo Ventures’ Venky Ganesan says his VC firm’s early and big bet on the ride-sharing pioneer is a perfect metaphor for the difference between the two record-setting eras.
“The story of technology is that we overestimate its impact in the short run and underestimate it in the long run,” says Ganesan. “And that’s what happened with the Nasdaq; in 2000, we overestimated how quickly the Internet would change our lives and now in 2015 we are underestimating the impact of mobile, social and cloud.
“The Nasdaq,” says Ganesan, “is finally catching up.”
Perhaps no one company says more about this tale-of-two-Nasdaqs than Apple. In 2000, the company wasn’t even included among the largest 20 companies by market value in the index. Today, with its $760-billion market value, Apple accounts for 10 percent of Nasdaq’s weight.
While this record high puts the excesses of the dot-com days in sharp relief, it also fuels anxiety among some investors and analysts who worry we are in the midst of another bubble, evidenced by multibillion-dollar valuations for pre-initial public offering companies like Uber and Snapchat, the Los Angeles-based firm behind a mobile app that sends disappearing photo messages.
“There’s something about the Nasdaq hitting a new high that makes me nervous,” says Cindy Hounsell, president of the nonprofit Women’s Institute for a Secure Retirement.
“All these people have finally gotten their retirement accounts back up to where they were before the recession, which is great. But every time we’ve seen it go up and up we’ve also seen it go down. And research shows that Americans are really good about buying high and selling low.”