How Today's Tech Run Differs From the Dot-Com Bubble
February 03 2020 - 12:50PM
Dow Jones News
By Akane Otani
Just five stocks account for nearly a fifth of the S&P 500's
total market capitalization -- the highest share since the dot-com
bubble peaked at the turn of the century.
Are there worrying parallels between the ascent of Facebook
Inc., Apple Inc., Amazon.com Inc., Microsoft Corp. and Alphabet
Inc. and the ill-fated dot-com boom of 2000? Goldman Sachs Group
Inc. says not yet.
For one, the stock market's five biggest companies don't look as
expensive as their counterparts from 2000.
In March 2000, Microsoft, Cisco Systems Inc., General Electric
Co., Intel Corp. and Exxon Mobil Corp. made up 18% of the S&P
500's market capitalization. The five companies traded at 47 times
expected earnings, according to Goldman. Today's five biggest
companies trade at 30 times expected earnings -- making them by no
means a bargain, but still less expensive than the stocks that
dominated the stock run in the early 2000s.
The tech giants powering the S&P 500 today also reinvest far
more of their profits into their businesses than their predecessors
did.
The five companies funnel about 48% of their cash flow from
operations into capital expenditure and research and development
spending, according to Goldman, well above the S&P 500's 21%
average and the 26% average for the five biggest companies in March
2000.
Then there are earnings. Apple, Microsoft, Facebook and Amazon
reported quarterly results last week that showed their core
businesses remain on strong footing, even in a slowing economic
environment.
Apple, for instance, posted record revenue for its latest
quarter, thanks to strong sales of its iPhone and a pickup in sales
of products like its apps and AirPods wireless earbuds. Growth in
its cloud-computing offerings helped Microsoft deliver record
sales. Facebook and Amazon also posted double-digit percentage
revenue growth.
Will the companies be able to sustain their record of growth? It
is unclear. Money managers say there are still risks that
longstanding issues like regulatory scrutiny and shifts in user
behavior could hit the technology sector. The stocks have also been
among the worst-hit in waves of selling that the stock market has
endured in the past few years, something investors have attributed
in part to crowded positioning in the growth trade.
But for now, Goldman says there is reason to believe today's
S&P 500 behemoths are different.
"Lower growth expectations, lower valuations and a greater
reinvestment ratio suggest the current concentration may be more
sustainable than it proved to be in 2000," the firm said in a
note.
Write to Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
February 03, 2020 12:35 ET (17:35 GMT)
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