Round stockmarket numbers are often big occasions. But “this one carries with it quite a bit more baggage” than most, says Ari Levy on cnbc.com.
In March 2000, the Nasdaq Composite index eclipsed 5,000, marking the peak of the dotcom bubble. A few days later it began an 80% decline that bottomed out in 2002. So now that the index is finally back to its old high, should we expect a repeat performance?
It’s far less likely than last time. Back then, the Nasdaq 5,000 was “madness”, says Levy – “$5trn of paper wealth waiting to evaporate”. Hopelessly unprofitable companies, such as Pets.com and Webvan (destined to end up in MoneyWeek’s “dotcom disaster of the week” column), queued up to float.
They were fought over by investors bedazzled by vague promises of future wealth. “If you could fog a mirror, you could go public,” says David Golden of Hambrecht & Quist. Companies were floating at over 30 times revenue in 2000, compared to a long-term average of 5.8.
This time investors are paying more reasonable valuations for much more reasonable companies. As the Nasdaq’s constituents started to produce earnings and investors became more cautious, valuations fell.
Today the index is on a price-to-earnings ratio of 21, compared to 100 in 2000. Applying that latter valuation to the index today would price it at around 30,000, says Alexander Eule in Barron’s. The flotation frenzy has also died down: 53 tech firms floated last year, down from 371 in 1999. Today, while there is still froth around, Nasdaq 5,000 seems reasonable.