Last November, the NASDAQ Composite (INDEXNASDAQ:.IXIC) crossed the 4000 mark for the first time since the dot-com crash, when it topped out at 5049 in March 2000. While investors are feeling bullish right now, and there have been a few tech IPOs that seem pretty optimistic, the makeup of the NASDAQ CM has changed dramatically over the years. It now has a smaller IT bias, fewer companies with larger market caps, and valuations that signal the growth-heavy nature of NASDAQ listed companies without having left orbit.
NASDAQ has half as many listings, but larger market caps
The most obvious difference between the NASDAQ Composite (INDEXNASDAQ:.IXIC) now and 14 years ago, the last time it rose above 4000, is that it has about half as many listed companies: 4,715 then compared to 2,472 today. The total market cap is actually slightly higher ($6,271 billion versus $5,453 billion) because many of the remaining companies have issued more shares, but the average market cap is roughly twice what it was in 1999. The drop in listed companies is by no means unique to the NASDAQ composite – total listed common stocks have dropped steadily nationwide over the last decade.
Of the companies that left the index between 1999 and today, “54% of the stocks by market cap (and 46% by number of deleted stocks) were removed due to merger and acquisition activity,” write NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) head of research for global indexes David Krein and managing director of economic research Jeffrey W. Smith in an April 2 report. “This runs counter to the popular belief that in the collapse of the tech bubble most of the NASDAQ stocks were “dot-coms” and deleted due to bankruptcy. This is, in fact, not the case at all.”
The next largest categories for deletions were voluntary delistings (25%), some of which likely would have been delisted and simply took matters into their own hands, and 17.4% which were delisted due to regulatory non-compliance, usually meaning that they were heading toward bankruptcy and no longer met the exchange’s listing requirements.
Companies that survived the dot-com bubble and are still listed on the NASDAQ, what Krein and Smith call veterans, make up 61.2% of the NASDAQ CM by market cap, followed by 19.8% made up of 710 IPOs held on the NASDAQ since 1999. Switches from other exchanges made up just 10.8% of current listings by market cap.
NASDAQ less tech-centric, valuations nowhere near 1999 levels
While the NASDAQ is still more tech-centric than other US exchanges, IT only makes up 38% of the index by market cap, compared to 57% in 1999. Valuations are high, with an index-wide PE multiple of 31, but that’s nothing compared to 1999 when the PE multiple for the index was an amazing 152. Similarly, the price-to-book is 3.9, compared to 6.7 in 1999, and companies on the NASDAQ CM are more willing (and more able) to pay dividends bringing the dividend yield to 1.22% from 0.11% in 1999.
The NASDAQ is still distinct from the other US indexes in that it has higher volatility and has recently pulled away in terms of stock price, but if a bubble is developing it doesn’t look anything like what we saw in 1999.