Is this a new tech bubble?

The tech stock boom and bust of 1998-2002 was one of the greatest ever market bubbles, taking its place in the history books alongside Amsterdam’s 17th-century tulip mania, the UK’s South Sea fiasco of 1720 and the Wall Street craze of the 1920s.

Nasdaq 100 index 1996-2012After reaching 4816 in March 2000, the tech-heavy Nasdaq 100 index fell by 83% in little more than two years, devastating the portfolios of those surfing an internet-fuelled wave of optimism. Now, following a decade in the doldrums, the Nasdaq 100 is rapidly closing in on its post-millennium peak (see the chart). Is history repeating itself?

Not quite. First, the index isn’t the same as it was during the overheated months of the tech bubble. An index is just a shopping basket of stocks. Handily, you can buy it in a single purchase via an exchange-traded fund (ETF). But indices, especially those that weight their constituents by their market size (capitalisation), can change their constituents quite dramatically over time.

And, name apart, today’s Nasdaq 100 bears little resemblance to the one that peaked in early 2000. Only one of the top five stocks by market capitalisation in the 2000 version of the index is still there – Microsoft. The other members of the 2000 top five – Cisco, Intel, Oracle and Ericsson – have all either been demoted or have dropped out of the index altogether. Instead, new tech giants like Apple, Google, Amazon and Facebook are now the Nasdaq 100’s leading stocks.

More importantly, though, the extreme valuations of the 2000 bubble are far from being repeated.
Of the two largest companies in the index, Apple (with a 12% weighting) has a price/earnings ratio of 13 and Google (with 8%) trades at 33 times last year’s earnings. Overall, the Nasdaq 100 trades at a multiple of 21 times earnings – certainly not cheap, but hardly stratospheric. Remember that at the peak of the market in 2000, Microsoft traded at 64 times earnings, Intel at 63, Oracle at 124, Cisco at nearly 200 and semiconductor firm Qualcomm at 235.

You can buy London-listed Nasdaq 100 ETFs from iShares, Lyxor and Amundi (with annual expense ratios of 0.33%, 0.3% and 0.23%, respectively). Alternatively (since the Nasdaq 100 selects from all non-financial stocks, not just tech companies), Source’s Technology S&P US Select Sector UCITS ETF, which charges 0.3% a year, gives you purer exposure to the sector.

• Paul Amery, formerly a fund manager and trader, is now a freelance journalist. Disclosure: He has recently done contracting work for Lyxor.


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