The Nasdaq’s impressive rally appears to be running out of steam.
Last week, the index fell 4.2% and is currently down 10% from its September highs.
Plenty of analysts say this bull run reminds them of the 2000 dot-com bubble.
I disagree. In my opinion, there are significant differences between then and now.
In 2000, most dot-com companies had little to no earnings backing their valuations.
The entire stock market rally was based on promises of massive future returns and fundamental analysis was thrown out the window. All a company needed to do was add “e” or “.com” to its name and investors rushed to buy its stock.
Inevitably, the house of cards came crashing down. In 2001, the hyped up start ups failed to generate profits, others got caught cooking the books, and most filed for bankruptcy.
Who remembers the behemoths of yonder such as boo.com, startups.com, Worldcom, pets.com, geocities.com, or even open.com? I sure didn’t. I had to google “dot com bubble” to find an article mentioning them.
What separates them from today’s big cap stocks you ask?
Today, FAAMNG stocks generate billions in revenue and have deep pipelines of disruptive tech.
The FAAMNNG stocks driving the market cannot be compared to the dotcom startups of 2000 in any way, shape or form.
For starters, they generate billions of dollars in revenues and are highly profitable:
- Facebook posted 2019 revenues of $70 billion and a net profit of $20 billion.
- Amazon posted 2019 revenues of $280 billion and a net profit of $11 billion.
- Apple posted 2019 revenues of $260 billion and a net profit of $55 billion.
- Microsoft posted 2019 revenues of $140 billion and a profit of $44 billion.
- Netflix posted 2019 revenues of $20 billion and a net profit of $1.8 billion.
- Google posted 2019 revenues of $160 billion and a net profit of $34 billion.
In addition, they have billions in cash and equivalents on their Balance Sheets:
- Microsoft has $136 billion.
- Google has $121 billion.
- Apple has $93 billion.
- Facebook has $58 billion
- Amazon has $49 billion.
- Nvidia has $16 billion.
- We can cite plenty of others: Paypal has $13 billion in cash, Visa has $12 billion, Square has $5 billion… Even Netflix, who is notorious for burning cash, has a cool $5 billion on its Balance Sheet.
Casual observers underestimate how powerful a force this excess cash really is. It allows companies to hire and keep the top talent, invest crazy sums in R&D, fight off lawsuits and pay hefty settlements, donate to politicians on all sides and acquire innovative start-ups or just about any company they want.
For example, Nvidia is on the brink of completing a cash and stock deal worth up to $40 billion deal to acquire Arm from Softbank, which will increase its dominance of the chip and hardware market.
No dotcom company came anywhere close to matching these metrics and achievements.
The top Nasdaq stocks may be slightly overvalued based on today’s cash flows but they are definitely undervalued compared to where they will be in 10 years.
Here are just a handful of references for good measure:
- Apple is reportedly developing their own satellites to beam data directly to their devices because they don’t want to deal with traditional internet providers anymore. Don’t forget the medical potential of smartwatches, their plans to develop their own ARM-processors for Mac and their gradual transformation into a services company.
- Facebook ambitions to launch a digital coin which will compete with traditional fiat currencies, causing the Fed’s advisors to label it a threat to the monetary system.
- Amazon is now bigger than most brick and mortars retailers put together.
- Google has a market value of $820 billion and its dominance in online searches and advertising enables it to target millions of consumers for their personal data.
- Microsoft’s operating system dominates personal computing and this is only one of its many highly lucrative and rapidly growing segments.
These are just a few examples of why the top Nasdaq stocks warrant such bloated valuations by today’s standards. If you simply analyze revenue growth and cash flows, you will be unable to understand the high multiples these companies are trading for.
However, if you take a step back and look at the bigger picture, you will start to fathom why big money is flooding into these stocks. Beyond offerings and pipelines, their dominance makes them de facto safe havens for storing one’s cash since there are no viable alternatives. Would you rather place your money on a 2% savings account, a bond with a 0.5% yield or a FAAMNG stock with an average anual return of 30%?
Lastly, and perhaps more importantly, in 2000, the Fed’s money printer wasn’t going crazy like it is now.
Since March, the US Federal Reserve has printed nearly $3 trillion of fresh cash to stimulate the markets. Powell and co are pumping trillions into US Treasuries, mortgage-backed securities and, for the first time ever, corporate bonds. The Fed’s purchase of corporate bonds is probably the single biggest cause of the stock mark’s impressive rally as it allows the big corporations to buy back their own stock in droves.
To put this in perspective, the Fed ‘only’ printed $1.3 trillion to bail out the big banks in 2008. In the early 2000s, the Fed lowered interest rates to stimulate the economy but, to the best of my knowledge, it did not intervene in the credit and bond markets as aggressively as it is now.
Is this creating a bubble? Won’t the party end once Fed liquidity dries up?
Well, the Fed’s policy is clearly pushing stocks higher and Jerome Powell declared that it will continue to do so until the economy fully recovers. This sounds insane but the fiat system allows the Fed to print unlimited amounts of currency.
Monetary expansion is indeed worrying but don’t forget two important facts: 1- the USD is still the world’s reserve currency so hyperinflation scenarios are very unlikely and 2- a weaker dollar will actually help the US economy recover as its exports become cheaper.
Thus, not only FAAMNG stocks are not going anywhere, they will continue to grow for years to come
The stock market’s largest companies are not going to go bust like the dot com companies did in 2000. In fact, this pandemic will reinforce their dominance at the expense of smaller sized companies who don’t have the liquidity to survive the challenging economic climate.
Just look at Amazon: At the height of the pandemic, they were generating an estimated $11 thousand per second in sales. In the midst of dividend cuts, bankruptcies and massive layoffs, the company posted record sales. Apple and Microsoft also posted better than expected earnings this year. The reason tech stocks are doing so well is because the rise of the work from home trend reveals that they are producing goods and services that people actually want.
Should we expect pullbacks and corrections? Of course.
Last week’s dip may be the start of a healthy and much needed correction. In fact, the overall economic outlook is bleak and the fact that a very disputed election is coming will cause some market turbulence. However, it won’t buck the Nasdaq’s long term trend, which is undeniably bullish.
Additional food for thought: The Nasdaq 100 ETF has generated total returns of more than 500% since 2012. That’s basically a 60% average annual return.
Now, ask yourself: Is technology the future or the past?
I’m analyzing societal trends and I made my mind up pretty quickly: I have no intention of missing out on the incredible gains tech will continue to deliver in the next decade.
As always, the best strategy is to buy regularly and hold for a long time
Don’t try to time the market and don’t let short term volatility get the best of you.
Establish a long term strategy and stay the course.
My long term plan remains the same: Live below my means and invest as much as I can in market-tracking index funds until I hit age 65. Then, I’ll live off the dividends until I pass away.
What’s your plan?
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DISCLAIMER: This article is the fruit of my personal research and should not be viewed as financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.