Are we in a tech bubble all over again?

Some say the Nasdaq looks nothing like it did in the dot-com days. Here are some points to consider.

By MSN Money Partner May 6, 2014 9:02AM
Dollar sign on keyboard © CorbisBy Paul J. Lim, Money Magazine

When you think of the Nasdaq, what comes to mind?

An index of speculative tech companies that soared to dizzying heights in the late 1990s -- and still hasn't fully recovered? Or a diversified benchmark of mature businesses that has trounced the Standard & Poor's 500 Index ($INX) and the Dow Jones industrials ($INDU) over the past decade?


With the Nasdaq Composite Index ($COMPX) at its highest since March 2000, there's growing talk about how the index looks nothing like it did in the bubble years.


How sure are you, though, of the "this time things are different" arguments?


ARGUMENT NO. 1: This is not the same tech-loaded index it was.

The reality: In March 2000, tech accounted for half the Nasdaq's stock market value, and the top five holdings were Cisco (CSCO), Microsoft (MSFT), Intel (INTC), Qualcomm (QCOM), and Oracle (ORCL). (Microsoft owns and publishes Top Stocks, an MSN Money site.)


Now tech is 45 percent of the index, and the top five stocks are Apple (AAPL), Google (GOOG), Microsoft, Amazon.com (AMZN), and Facebook (FB). This mirrors the broad market, where tech is no longer a third of the S&P 500 à la 2000 but is still the biggest sector.


The takeaway: Own an S&P 500 fund, and you don't need a tech-centric one. Already, $1 out of every $5 you have invested is in technology stocks, which is plenty.


ARGUMENT NO. 2: The biggest tech stocks, such as Microsoft and Intel, have matured.

The reality: True, but over the past 5.5 years blue-chip tech has gone from trading at a 10 percent discount to the S&P to a 5 percent premium. The bigger problem lies beyond the largest players.


"Unlike 2000, where the large-caps were insanely overvalued, today what you're seeing is the smaller-cap names are the most expensive," says Ben Inker, co-head of asset allocation at GMO.


For instance, many of the small-to medium-size companies in the Nasdaq biotech index have been on a tear, such as Isis Pharmaceuticals (ISIS) (up 282 percent in 2013) and drugmaker Incyte (INCY) (up 205 percent). The index now trades at a price/earnings ratio of more than 170.


Meanwhile, many of last year's hottest social media stocks, such as Groupon (GRPN), Zynga (ZNGA) and Zillow (Z), are still profitless.


The takeaway: Don't load up on blue-chip tech, and take profits in biotech and social-media stocks.


ARGUMENT NO. 3: Nasdaq's P/E is a fraction of what it was in 2000, so you can't call it frothy anymore.

The reality: Compared with a P/E of 175 in 2000, today's Nasdaq looks "reasonably" priced at around 30 times earnings. But it's foolish to make relative judgments against such historically extreme cases, says Greg Schultz, a principal with Asset Allocation Advisors.


The takeaway: Don't touch this index -- it trades as an ETF (ONEQ) -- until prices fall. Buy cheap, as the Nasdaq was in the early 1990s, and you do well. 


"Pay too much," says Schultz, "and you get bad returns. It's as simple as that."


More from Money Magazine


41Comments
May 6, 2014 11:59AM
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"""""Don't understand this being a Tech Bubble....

I thought Tech Companies, built things, most of these Companies DON'T..."""""

 

You are correct - These writers are classifying "Social Media Crap" as Tech Companies. They are not tech in any form . They need to differentiate between the two. 

May 6, 2014 10:15AM
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The original dot.com bubble was wide ranging and PE's were all over done.  This bubble is narrower mostly confined to social networking and web advertising.  Why does everyone think that any site with millions of viewers can generate Ghoulish advertising revenue?
May 6, 2014 10:12AM
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We are in a fake money bubble.  These super low interest rates and Obama's money printing gone wild means things are worth way more than they should be.
May 6, 2014 3:29PM
May 6, 2014 3:02PM
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To the "it is all Bush's fault" morons.  Blame Bush?  Get Real.  Did not you morons hire Obama to fix "Bush's mess"?  Where is the fix?   Oh, sure the fix is 1.2 trillion dollar annual deficits up from Bushes 300 billion.  Oh sure the fix is 20 trillion nation debt, a doubling in 8 Obama years!   Oh sure the fix is higher healthcare premiums, if you can keep your plan at all, when he PROMISED a $2500 reduction.   Oh sure the fix is 7% unemployment (real figure accounting for job participation rates is closer to 10 or 12%) up from the Bush years of 4.5% year after year after year.  And millions moved from full time job to part time jobs.  And ....


Sure glad we hired Obama to fix all this stuff.  Pull your head out.

May 6, 2014 3:45PM
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The US economy started to go down the tubes when they passed the NAFTA "free" trade laws and then "deregulated" the banks by overturning the Glass steigal laws in the 90s. Since then it's been one fed induced bubble and collapse after the next (dow 16000 is the biggest bubble in history) , all of them just smokescreens to cover up the real problems above that they don't want to admit were mistakes. The stock indexes are valued at 8 times what the were in the early 90s. Does anyone really believe that things are 8 times better now than they were then? No way! Things are actually much worse now. It's easy to look away from the truth when you believe you're making money from the lie.
May 6, 2014 3:24PM
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What ever happened to those kind of men that founded this country?  What ever happened to the kind of men that defended the constitution? What ever happened to a real leader ready and willing to take the challenge and lead?


My fellow Americans does not open a speech anymore. Now it's (My indentured servants) I have a pen and a cell phone and I'm not afraid to use it!


This county is so dekcuf it unbelievable. Hang on to your hats my friends the market is going down.

May 6, 2014 10:26AM
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"Why does everyone think that any site with millions of viewers can generate Ghoulish advertising revenue?"

Beyond grubbers who invest but could care less what it does to the nation and economy, the rest of us question WHO ACTUALLY PAYS for the ads? They are self-created by the site and advertise each other, thus making the cost as hollow virtual as the platform. It's an out-of-control racket. Just look at Twitter-- it funded corruption AGAIN and now they are cashing it out. What will be left won't be anything tangible at all. 
May 6, 2014 10:23AM
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Obama's money printing? GEORGE W. BUSH redesigned the currency, installed faster printing presses and not only raised the debt ceiling more times than any President in our History, he also gave out closed-bid contracts and never paid any bills! So Obama pays those bills and deals with job blockades, pledgers in Congress and literally TREASON by the GOP. Stop blaming HIM, start figuring out YOUR future because ALL OF OURS looks mighty dim THANKS to money grubbers... no party specification needed. This has been about power and control by people wearing Depends and getting weekly blood transfusions to cheat Death. No one ever has. This won't end well at all. 
May 6, 2014 4:15PM
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So the article is saying don't buy high, buy low and sell high.  Thanks captain obvious.  The historical average is PE of 12 to 15 for the general stock market so ya 30 times is overvalued.

If you read the comments they're saying it's Obama's fault that tech companies are over valued, which is not grounded in reality.  Obama has nothing to do QE, nor does Bush.  The FED is an Independent organization so lets try and think what that means before we spout off nonsense.

The only interesting point made on here is distinguishing between social medal/internet companies and tech companies that actually produce product.  They will be left standing when the fad companies are gone.  Although I do think Facebook will survive in some form, just won't be worth nearly as much.

May 6, 2014 11:34AM
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Don't understand this being a Tech Bubble....

I thought Tech Companies, built things, most of these Companies DON'T...


They just rope in users....When you have too many ropers and not enough users, some thing's are going to fail..


What fake money, or money printing has to do with article, makes little sense..

That's like saying the Raisin Crop is going to fail. 

May 6, 2014 2:33PM
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The game board is being redesigned but the rules look very similar. Ask yourself this---Who is it that is asking you to play?

May 6, 2014 10:58AM
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The Money Printing started long before the Fed started it's QE to infinity. Dumb and Dumber will tell you otherwise.
May 7, 2014 5:07AM
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"ARGUMENT NO. 3: Nasdaq's P/E is a fraction of what it was in 2000, so you can't call it frothy anymore.

The reality: Compared with a P/E of 175 in 2000, today's Nasdaq looks "reasonably" priced at around 30 times earnings."

No, you clearly have no idea what the Reality is. Back then, I highly doubt companies were engaged in the type of massive Financial Engineering that we are seeing today. When that collapses and companies are faced with the need of Real Organic Growth, earnings will literally collapse.

Also, again, the money printing started long before QE to infinity. QE is just one of the many cures thrown at the original problem. The Original Problem, folks are terrified to actual discuss that 800 pound Gorilla. Never solved, only delayed.
May 6, 2014 5:12PM
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Its' soon to be Ali Baba and the Forty Thieves!!!!
May 10, 2014 4:12PM
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America is the ultimate "Ponzi" scheme
May 10, 2014 2:22PM
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Nothing is real, all of this stock stuff is controlled by the haves and there political puppets. They don't gave a rats as if it all tanks since they make money either way. Don't believe it ? Then name one of these money bags just one that is worst off today than he or she was before the last recession.
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You all live in a bubble.! Americans shhsh    Stay thirsty my friends
May 6, 2014 4:25PM
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There are reasons we warned you this morning to be careful and stay on the sidelines; manipulators took control on and off the floor since the opening bell. The question wasn't if we were going to end down but how low would they bring us....Now we know, 130 in the Dow 17 theS&P and 57 the Nasdaq...Why you may ask? Because they can, because cheaters do and undo at will as long as they know they can and will get away with it....Oh well, cheating still pays on Wall Street, lets see what happens tomorrow.
May 7, 2014 8:56AM
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There never was a "Tech Bubble" in the first place. Tech sales were driven by Y2K. Once 1/1/00 came and went, tech demand went from boom town to zero. A recession and market crash were inevitable. PE's and everything else these analyst reporters throw out there had nothing had nothing to do with it.
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