The PowerShares QQQ (NASDAQ:QQQ), which tracks the tech heavy Nasdaq-100 Index, and other well-known technology sector ETFs have recently encountered headwinds at the hands of the FAANG stocks and other marquee technology names, but investors should be careful when fretting that another technology bubble is on the way.
Technology companies are still sitting on cash hoards that can be deployed in ways to improve value with investors. We are already seeing an increase uptick in company share buybacks and tech firms are now even issuing dividends.
The industry continues to grow through innovation as more shift to cloud, progress into artificial intelligence and adopt internet of all things devices.
“Technology has been the best-performing sector of the S&P 500 Index in 2017,” said PowerShares. “As such, some investors are drawing comparisons between today’s technology bull market and the infamous dot-com bubble of the late 1990s, which reached its peak in March 2000. Both then and now, technology stocks were catalysts behind major market rallies.”
Although the technology sector trades at multiples above those of the broader market, stocks such as Apple Inc. (NASDAQ:AAPL), Facebook Inc. (NASDAQ:FB) and Amazon.com (NASDAQ:AMZN) are not so stretched on valuation that investors should worry that a sequel to 2000 is imminent. Those stocks are three of the top 10 holdings in QQQ.
“Today’s “Power Five” trade at an aggregate of 30 times trailing earnings. That compares with an aggregate of 78 times trailing earnings for the five largest tech stocks in March 2000. This difference equates to total valuations for the five largest technology firms that are 60% lower than they were 17 years ago.
Related: As Tech Stocks Surge, Bullishness Not Confined to U.S.
If each of these companies saw their stock prices double (and we’re not suggesting they will), their market capitalization-to-net income multiple would rise to 60x, which would still be less than the five largest technology stocks at the height of the tech bubble,” according to PowerShares.
QQQ, one of the largest U.S. ETFs, has equal-weight equivalents equal-weight equivalents such as the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca:QQQE) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS:QQEW).
For more news and strategy on the Technology market, visit our Technology category.
Tom Lydon’s clients own shares of Apple, Facebook and QQQ.