The Nasdaq 100 has risen consistently over the past 2 1/2 weeks even as other markets stalled or faltered, climbing about 5.6%. Investors are euphoric. The only really bad day was Wednesday after Apple, the index’s biggest component, reported mixed earnings after the stock market closed Tuesday.
Let’s review the Nasdaq 100’s
current valuation and some of its components, including Facebook
both of which are testing longer-term resistance levels. Facebook is the fourth-largest member of the tech-bellwether index, and Microsoft is No. 2.
First, data show that the price-to-earnings (P/E) multiple on the Nasdaq 100 is 26.04, up 19% over the past year. The index has increased, in large part, due to multiple expansion, but overall earnings have not supported the increase in price.
Second, the dividend yield on the Nasdaq 100 has fallen by 15.5%, and currently is only 1.09%. Dividends have not been increasing, and have not supported higher prices either.
However, prices have increased, in almost a one-sided fashion at times, and when we look at the share prices of Facebook and Microsoft, we see similar patterns. But something interesting exists there.
Whereas Facebook has earnings growth that largely parallels its stock-price chart, Microsoft does not. Facebook’s stock is up 32% this year, triple that of Microsoft’s.
The following six valuation charts for each stock supports the findings:
Facebook is expected to have trailing 12-month (TTM) quarterly growth of 12.5% in the coming quarter, and Microsoft is actually expected to have a slightly negative growth rate. Yet the stock-price charts are almost identical.
Overall earnings growth this year is expected to be slightly above 5% for Microsoft, but the 23 multiple looks excessive when compared with that growth rate. The TTM PEG ratio (trailing 12-month price-to-earnings-to-growth ratio) for Microsoft is set to surge to 4.4 this year, and our assessment of fair value is when TTM PEG ratios are between 0-1.5.
Interestingly, although Facebook has a P/E ratio of 35, its annual growth rate is expected to be 53%, which causes its TTM PEG ratio to fall to 0.51, in line with fair value.
Looking ahead 12 months, the growth rate of Facebook is expected to fall, but so is the P/E multiple, and the overall TTM PEG ratio is still expected to be below 1 given that scenario. This would suggest that Facebook, even with its higher P/E ratio, is an interesting value.
The same cannot be said for the Nasdaq 100 as a whole, and Microsoft is a good example of that. As does Microsoft specifically, the Nasdaq 100 as a whole lacks value, as proven in the statistical data for the Nasdaq 100. And, arguably, stocks such as Microsoft have been direct beneficiaries of money flows that come into Nasdaq 100-based exchange traded funds such as PowerShares QQQ Trust
because of the growth of other stocks with eye-popping results like Facebook.