NASDAQ 5000 – What a Difference 15 Years Makes via Oakmark funds
March 13, 2015
Reading the financial press over the last few weeks, you may have noticed several articles highlighting the NASDAQ Composite’s return to the 5000 mark in early March—almost exactly 15 years after its prior peak in March of 2000. The common theme in the press seems to be wariness that another technology stock bubble could be forming. The attention is understandable, given our human tendency to reflect on big anniversaries and over-emphasize large round numbers; however, we believe concerns of another technology stock bubble are misguided.
We believe the NASDAQ 5000 of 15 years ago is very different from the NASDAQ 5000 of today. While the price of the index is the same and contains many of the same high-quality technology businesses it did in 2000, the underlying value in the form of earnings is quite different. So different in fact that technology was the second largest sector weight in the Oakmark Fund, at 25% as of the last quarter, compared to a 0% weighting in March of 2000. So how have we come to such different conclusions 15 years later?
First, consider the starting point. In March of 2000, the average company in the technology sector was selling for nearly 50x earnings, while non-technology companies were valued at less than 12x earnings1. Given our disciplined approach to value investing at Oakmark, this made avoiding technology stocks rather easy.
Fast forward to 2015 and the average technology company has a P/E of 18x, almost exactly matching that of non-technology companies2. That P/E comparison, however, isn’t quite fair. First, we find technology companies tend to have much more net cash per share than the average business, and that cash isn’t earning much of anything at today’s interest rates, which means the simple P/E understates value. In addition to having better balance sheets, many of these technology companies are growing at above-average rates, with above-average returns, and therefore deserving of an above-average multiple.
Perhaps a few representative examples will help illustrate what we were avoiding in 2000, but happily own today.
- Much like the NASDAQ, Oracle’s share price is virtually unchanged from where it was in March 2000, yet its revenues per share have grown more than five-fold, earnings per share (EPS) more than seven-fold, and net cash per share is higher than it was in 2000. Today, Oracle sells for what we consider a very reasonable 14x this year’s EPS.
- Microsoft’s share price is down more than 15% over the last 15 years despite having grown its revenues per share more than five-fold and EPS more than three-fold, while growing its net cash several dollars per share. Today, Microsoft sells for less than 17x EPS, or 13x net of its large cash balance, while yielding 3%.
- Qualcomm’s stock price has increased less than $4 to roughly $69 per share in fifteen years, yet EPS has grown more than twenty-fold and net cash has grown to roughly $18 per share. Today, Qualcomm sells for less than 16x EPS, or less than 12x net of cash.
- Intel shares are still almost 50% below their peak in March 2000, yet revenues and EPS have more than doubled. Today, Intel is selling for just over 13x our estimate of 2015 EPS and yields over 3%.
- Even technology companies that today are growing at very “year 2000” rates—and either didn’t exist or have share prices that have appreciated greatly since then—have experienced fundamental growth that has greatly surpassed that of their stock price. For example, Amazon’s stock is up more than 450%, but its revenues per share have grown more than 3700%. As a result, Amazon sells at a discount to the average retailer on total capitalization to sales when properly adjusting for third-party sales. Google sells for close to a market multiple net of cash despite growing sales nearly 20% annually. Apple’s earnings are up 57-fold, or more than twice its stock price, which is up almost 28-fold and sells below the market multiple before accounting for a cash balance larger than the market cap of Pepsi.
So as you ponder the implications for technology stocks as the NASDAQ makes its return to the 5000 mark, remember the Ben Graham quote popularized by Warren Buffett, “Price is what you pay, value is what you get.” With many technology stocks today, you may be paying about the same price, but we believe you are getting a whole lot more value.
Thank you for your interest in Harris Associates and the Oakmark Funds.
Data is as of March 10, 2000 and March 10, 2015, respectively.
1Refers to median P/E within S&P 500 as of March 2000.
2Refers to median current year P/E within S&P 500 as of March 2015.
As of December 31, 2014, the following equities were held as a % of the total net assets:
Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to access the full list of holdings for the Oakmark Fund as of the most recent quarter-end.