Gains in the Nasdaq Composite this year have far exceeded the S&P 500 Index and the Dow Jones Industrial Average, supported by the decrease in the external risk factors and the growth stocks are chased by the investors again. Over the past three or four years, many companies shelved the necessary investments in technologies due to the financial crisis, but as the consumer confidence has been enhanced, coupled with the improvement in the job market, many companies have re-started the investment in technologies, promoting the technology stocks to perform better than the stocks of the other industries.
Over the twelve years since the Internet bubble burst, technology companies have made reasonable adjustments and found a steady business model base. Companies such as Google, Intel and Microsoft which in face of the current uncertainty of the economic environment still are able to create stable cash flows, meanwhile pay regular dividends, inspire the confidence of the investors in investing in the technology stocks.
The Nasdaq composite index fluctuated like a roller coaster over the past 10 years. However, since the financial crisis in 2008 and 2009, companies all over the world including technology companies had experiencing a “deleveraging” phase, and consolidated the balance sheets, in the meantime the Fed’s quantitative easing policies not only had prevented the market collapse but also promoted the Internet stocks to perform better than the other stocks.
Compared with a decade ago, the biggest difference of the Nasdaq Composite is that the current relative valuation is more sustainable than before, the investors learned lessons from the past currently are more sophisticated than before. The Nasdaq Composite is trading at 16 times historic earnings, much more reasonable compared with 150 times when the dot com bubble.
If you see the recent IPOs of the technology companies such as Zynga, LinkedIn, and the upcoming Facebook, you may think that the tech industry is going to be on the edge of the irrational fanaticism once again, but we thinks the investors have been better able to judge the potential of a company’s business philosophy. These good memories have gone away that a company simply in the disguise of “Silicon Valley” or relying solely on the earnings forecast for the next decade gets a good price in its public offering.
We believe that the performance of the Nasdaq Composite will still be pretty favorable in the future. In the early period, many companies were reluctant to make any investment due to the economic recession, but the situation has changed now, the industries have re-started to invest in capital goods, which will effectively improve the potentials for development of the respective industries. In addition, the increasing demands of the consumers in emerging markets for technology products such as LED TVs, smart phones, tablet PCs and consumer electronics products, coupled with the breakthrough in the online games, social networking, mobile computing and cloud computing, will boost the improvement in the high-tech industry and pusing the technology stocks prices to climb higher.