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Four Years and 3,000 Points Later


Wednesday, marked the fourth anniversary of the top in the NASDAQ Composite Index. On March 10, 2000 the NASDAQ traded as high as 5,132.52 and closed at 5,048.62. We know what as happened since. NASDAQ 5,000 could prove to be the high-water mark for decades to come, akin to 40,000 on the Nikkei. While technology stocks had a great year last year with the NASDAQ 100 was up almost 50%, it is one of the weakest sectors currently. On Wednesday, the Philadelphia Semiconductor Index (SOX) fell to the lowest level of the year and is now down over 6% this year and 15% from the recent peak reached on January 12. Also on Tuesday, the NASDAQ Composite Index fell into negative territory for the year. This weakness is especially noteworthy since most technology companies are reporting strong results and forecasts keep increasing.

Semiconductor booking and shipments rose in January, plus the book-to-bill ratio was greater than one for the fourth consecutive month. Semiconductor orders eclipsed the high level of 2002, and shipments are within one percent of the highest level reached in 2002. Both remain less than half from the peak levels reached in 2000. On Monday, Texas Instruments held its mid-quarter update. The leading maker of chips for mobile phones narrowed its sale guidance to the high end of its previous guidance. It forecasts revenue to be $2.835 billion to $2.950 billion for the first quarter. It said the strength is broad based and "It's not any single end-market" and that, "Most things we're seeing are generally at or above normal seasonal expectations for the first quarter."

Gartner Inc. increased its estimate for the number of mobile phones sold this year to 580 million units from 560, representing 7.7% increase from the 530 million sold in 2003. This is a much slower pace than the 21% increase in sales in 2003. Just to refresh everyone's memory, the industry's initial estimate of the number of mobile phones sales in 2001 was 550. Similarly, IDC is forecasting computer chip sales will increase 18% this year and by 7.8% per year for until 2008. Most of the strength will come from mobile computers as sales from mobile computer chips almost equal chips for desktops. Currently, it is only about 50%.

Now that demand is finally catching up to what the industry build up for during the boom, companies are starting to increase their capital expenditures. Semiconductor Equipment & Materials International (SEMI) forecasts that spending on chipmaking equipment will increase 39% this year. Japan's Sharp Inc. reported that it is doubling its spending on semiconductor equipment this year to $242 million. China's role will be getting bigger as well. LMNT, a South Korean company, plans to build a $1.4 billion plant in China this year and will operating by the end of 2005. US based, SPS has plans to build a $800 million plant in China.

On Wednesday, Tech Data reported that fourth-quarter sales increased 23% to $4.9 billion. The second largest computer distributor earned $0.67 per share, outpacing analysts' EPS estimates of $0.54. The company also guided first-quarter revenue and earning higher. Two weeks ago Ingram Micro, the world's largest computer distributor, reported that fourth-quarter sales jumped 15% and EPS increased almost 60%. It also increased earning guidance for the first quarter. After announcing its fourth-quarter results, IM's stock price jumped 22% to a three-year high, but has since backed off 7.6%.

While pre-announcements are usually more prevalent during the last two weeks of the quarter, there have already been 195 S&P 500 companies that have pre-announced for the first quarter. This compares to 170 at this time last year. Compared to last year, more companies are issuing positive guidance (31% v. 18% last year) than negative (48% v. 55%). Technology companies' pre-announcements are even better than the S&P 500. Thirty-seven percent of technology companies have pre-announced to the up-side with only 44% announcing results will be lower than expected.

I know it sounds like blasphemy, but maybe valuations are starting to matter. Maybe investors are being visited by the Ghost of NASDAQ Past and are realizing how frothy the market really is. Below is a table listing the top 15 companies in the NASDAQ 100. Since it is a capitalization weighted index, the top 15 makes up about half the weighting. I included what the current growth estimate for 2005 earnings and calculated the weighed EPS growth.

Stock 2005 EPS Growth NDX Weighting Weighted EPS Growth
MSFT 7% 8.3% 0.58%
INTC 18% 5.4% 0.97%
QCOM 5% 5.4% 0.27%
CSCO 15% 4.8% 0.72%
AMGN 19% 3.2% 0.61%
NXTL 9% 3.0% 0.27%
EBAY 34% 2.9% 0.99%
DELL 18% 2.6% 0.47%
CMCSA 81% 2.5% 2.03%
ORCL 12% 2.4% 0.29%
IACI 26% 2.0% 0.52%
MXIM 30% 1.9% 0.57%
BIIB 21% 1.8% 0.38%
SBUX 17% 1.8% 0.31%
AMAT 45% 1.6% 0.72%
Total 49.6%   9.7%

By dividing the weighted EPS growth by the percent of the index that the top 15 constituents comprise of, 49.6%, one can get a general idea of what the earnings growth will be of the index. In this case its 19.5. If analysts are correct in their forecasts for this year's earning and the NDX 100 remains at this level until the end of the year, investors will be paying 30 times for an index that is expected to grow earning by 20%. And that is also giving Wall Street analysts the benefit of the doubt for two years. While not near the asinine levels of 1999 and 2000, technology stocks are still on the expensive side. Just for argument sake, let's assume investors will be willing to pay a multiple of earnings that is equal to the growth rate, which not too long ago was considered a decent barometer. That alone would chop about one-third off the index, and much more if earnings falter over the next two years.

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