The Nasdaq turned 50 earlier this year. Launched on 8 February 1971 - at a starting level of 100 points - it was the first stock market in the world to trade electronically, as opposed to people dealing from a trading floor in a physical location.
It took the index 20 years to rise to 500, and nine more years to hit 5,000 – at the height of the tech bubble. So, when the index reached its next milestone of 6,000 some 17 years later, it was seen as big phycological level for investors.
Since then, the index has continued its upward momentum and, having reached 10,000 in July 2020 – just three months after the pandemic-induced global stock market falls – the Nasdaq closed above 15,000 for the first time last week.
|Level milestones||Time taken to reach new level**|
|250 to 500||7 years|
|500 to 1,000||4 years|
|1,000 to 2,000||3 years, 4 months|
|2,000 to 5,000||1 year, 3 months|
|5,000 to 6,000||17 years, 1 month|
|6,000 to 10,000||3 years, 3 months|
|10,000 to 15,000||1 year, 1 month|
A home for ‘growing’ companies to raise capital and trade, many of the 3,300 Nasdaq-listed firms are younger, faster moving entities that tend to reinvest the bulk of their profits into expanding their business. A large proportion – currently 50%* - are in the technology sector.
And the technology sector has been booming of late – benefiting from both structural and secular changes taking place across multiple industries as well as the enforced move to online that took place during global lockdowns.
The question now is, having seen stock prices rise so high, is technology still a good investment?
The Chelsea research team still likes the sector – just not quite as much as six months ago when it has a correction and prices became more attractive. “The bottom line is the big tech companies continue to deliver incredible earnings and most of them aren't really that much more expensive than the wider market,” commented James Yardley, senior research analyst.
“We don’t believe the big tech firms are in bubble territory – far from it. The likes of Apple, Amazon, Facebook, Alphabet and Microsoft are all behemoths which play into long-term structural themes.
“We all know the adage “buy low, sell high” but a rising share price does not mean a bubble. These companies have just delivered two astonishing quarters of earnings. Google (also known as Alphabet) comfortably beat analyst estimates, with YouTube, Android and Google Play just some of their dominant platforms. Google Cloud, which comprises Google Cloud Platform and Google Workspace, is currently costing the group hundreds of millions a quarter, that’s a huge business which is just in the rollout stage and is likely to be very profitable in the not-too-distant future.
“Another example is a platform like Facebook, which is also the developer for Instagram. It hasn't even really begun monetising WhatsApp yet, which it paid $15bn for. Net income more than doubled from a year ago.
“Apple’s earnings were also up 93 per cent year-on-year. Who leaves Apple when they join? If Apple decided to double the price of your device would you get rid of it? I suspect the answer for many would be no. It’s an incredibly strong business.”
The market and many investors have severely underestimated the persistence of the trends which are driving these businesses – many of which have been accelerated by the events of the past 18 months.
A major point of difference when comparing today’s big tech to those in the late 90s and early 00’s (prior to the last bubble) is that back then the internet was in its infancy, many companies had no cashflows in their business models and had no customers.
“The only way you could possibly argue these businesses are in bubble territory today,” continued James, “is if you think their earnings will collapse in the future. This seems extremely unlikely as digital trends, cloud computing and new frontiers, such as augmented reality and virtual reality, continue to grow. Although their forward earnings look expensive relative to their history, we must recognise that tech is being adopted by all of us at an unprecedented rate.
“And, although they appeared to be thriving compared to the rest of the global economy in 2020, let’s not forget that these large tech companies were also adversely affected by the pandemic. For example, Apple closed all its retail stores and Google lost all its revenue from travel-related searches. These lost benefits were hidden by the strength of their longer-term growth stories – something which has only become clear from the upswing in their results in 2021.”Please note that James personally owns shares in Facebook, Alphabet and Apple.
The opportunities to invest in technology are by no means limited to the US – there are strong tech opportunities in Europe, Asia and Japan, too. There are a number of funds on the Chelsea Selection that have more than quarter of the portfolio invested in the technology sector.
They include: FSSA Japan Focus (29%^), FTF Martin Currie European Unconstrained (27%^), Matthews Pacific Tiger (29%^), Baillie Gifford American (31.5%^) and Fidelity Global Special Situations (28%^). And of course, for those who would like a direct play on the sector, there is AXA Framlington Global Technology.
*Source: Nasdaqomx.com, 26 August 2021
**Source: Google finance
^Source: fund factsheet, 31 July 2021
Past performance is not a reliable guide to future returns. The value of your investment can go down as well as up and you may not get back the amount originally invested. The views expressed do not constitute financial advice. The mention of specific securities is for illustration purposes only, and should not be seen as a recommendation to buy or sell.