That's the question Bloomberg’s Surveillance host Tom Keene posited Tuesday morning. And what a profound question it is.
We looked back at the tech stock bubble peak in the early months of 2000. That dramatic rise in tech-stock prices took the Technology stock sector to almost 30% of the total market cap and bulled stock prices to about 175% of US GDP.
What If? A Theoretical Exercise
During that period, we performed a theoretical valuation exercise. We merged Cisco Systems (NASDAQ:CSCO) and Microsoft Corporation (NASDAQ:MSFT) into one theoretical company. Their combined market cap was $1 trillion at the beginning of the year 2000. Their combined earnings were $10 billion. The combined Cisco-Microsoft company was trading at 100 times its earnings. In that year, the total output of the world was about $30 trillion according to international agency estimates. That is, a global GDP of $30 trillion had in it one theoretical company worth $1 trillion, or 1/30th of the global GDP.
We published a piece about the valuation exercise in April 2000, in which we outlined the merger of the two companies and asked if the NASDAQ 5000 was setting up for a crash. With the help of Cumberland Advisors’ Director of Information Technology, Steven Hall, and a reminder of the piece from longtime friend Frank Riesenburger, we have posted that piece back to our website. The document, with some notations, may be viewed here. The original title asked whether the then-NASDAQ 5000 would become a crash victim.
Our conclusion at the time was that there was nothing wrong with either Cisco or Microsoft. Our second conclusion was that their stock prices were outrageously high. We based that on some simple back-of-the-envelope calculations that said, out of a $30 trillion GDP, there is only so much profit that can flow to earnings and then support the valuation of all of the stocks. These two stocks at 100 times earnings were greatly overpriced.
Times Are Different
Does that logic also apply to Apple (NASDAQ:AAPL) at 12 times earnings today? Does it apply to the Technology sector as a whole? On an even broader scale, does it apply to a world in which global output is much larger than it was 15 years ago? US GDP alone is nearly $18 trillion. We know that affluence grows in developing and mature economies where it is permitted to. And we know that technologies employed today are far superior in speed, accuracy, and productivity gains than those of 15 years ago.
Our conclusion is that Apple could become a true trillion-dollar company if it continues to innovate and expand, to add services to its hardware, and to do so in an orderly and thoughtful way. The opportunity presents itself in this modern and highly technological world. And we like the Tech sector with our ETF strategies. Apple is a large company, but it is only one component of the Tech sector.
At Cumberland Advisors, we do not own single stocks. Only exchange-traded funds are used as our stock market portfolio management tools. Our ETF strategy silos take several different forms. Apple is such a large weight that it gets into many of those funds automatically. Since we are overweight the Tech sector, that strategy puts us in the position of holding Apple and watching it rise.
David R. Kotok, Chairman and Chief Investment Officer