This from the JDSU thread:
To: Kent Rattey who wrote (2284)
From: Kent Rattey Monday, Nov 29 1999 3:58PM ET
Reply # of 2304
cbs.marketwatch.com.
From industry to information
New Nasdaq target 4,300
By Joseph V. Battipaglia
Last Update: 2:18 PM ET Nov 29, 1999
Commentary Section
Analyst Forum
NEW YORK (CBS.MW) -- Last week, I raised my year-end 2,000
Nasdaq composite target to 4,300.
This new target reflects the higher long-term (5
year) earnings growth rate of the Nasdaq
composite when compared to the S&P 500. By
our estimate, the Nasdaq composite's
price-to-earnings-to-growth rate is approximately
equal to the S&P 500 using twelve-month forward
earnings estimates.
As of Oct. 29, 1999, the Nasdaq traded with a
price-to-earnings multiple 1.79 times its estimated
long term growth rate of approximately 30 percent,
while the S&P 500 traded at 1.73 times its long
term estimated growth rate of less than 14 percent. This suggests to me
that technology valuations are not excessive given the strong, underlying
growth in earnings.
Since the disparity in earnings growth between the S&P and Nasdaq
companies is largely the result of the Nasdaq's heavy concentration in
technology, we extended our analysis to focus directly on this segment
within the Nasdaq. Technology now represents 71 percent of the equity
capitalization of the Nasdaq, 30 percent of the trailing 12-month revenue
and 43 percent of total projected earnings.
Overall, this segment tends to be more profitable and earnings growth
prospects far exceed the growth of most other sectors.
For many years, we have witnessed the evolution of the U.S. economy
from an industrial-based model to a network and information oriented
model because of rapid technological innovation, globalization and
deregulation.
The mass acceptance of the Internet has only accelerated this process.
(International Data Corporation, a leading technology research
organization, recently estimated that the worldwide spending on the
Internet economy, which includes e-commerce, IT infrastructure and
business spending, will soar past the $1 trillion mark by 2001 on it's way
to $3 trillion by 2003.)
New challenges
Just as the transformation of the economy has created opportunity, so too
has it challenged many of the basic rules for classifying a company's
business and measuring the value of productive inputs such as intellectual
property or the cost of creating these assets. This fact was evidenced by
the recent restatement of gross domestic product by the Bureau of
Economic Analysis to better reflect software development costs when
computing GDP statistics.
Therefore, in an age where intellectual property and intangibles are often a
company's most valuable productive asset, (as evidenced by Microsoft's
$450 billion market capitalization) it is important that the investors fully
understand the dynamics of each company's marketplace. It is no longer
enough to assume that all "technology companies" will be successful at
executing their business plans.
"Technology" redefined
Furthermore, it will become increasingly difficult to
partition off technology into a separate category
from the industrial economy. The recent decision to
add several technology names to the list of Dow
Industrials highlights this shift. The term
"technology" as popularly understood should lose
meaning just as the term "industrial" lost much of its
descriptive value as the industrial age evolved.
Two areas of special interest include "Internet
software, service and content providers" and
"telecommunication (or Internet backbone)
infrastructure."
While some fear the fallout of a burst "Internet
bubble," our analysis shows that Internet content
and software companies account for only 7 percent
of the overall Nasdaq market capitalization but
carry expected long-term growth rates
approximately twice that of other rapidly-growing
segments within technology.
As the weeks and months progress, I expect to see
a continued sorting out of these companies based on how well companies
meet or exceed expected earnings and partner with other companies in
the networked world.
Companies such as Yahoo!(YHOO: news, msgs) and America Online
(AOL: news, msgs), who have moved far ahead of the pack in terms of
establishing a dominant presence, are likely to continue to be successful as
economies of scale emerge and barriers to entry climb in their respective
businesses.
Network architecture benefits many
Internet software and content providers should materially benefit from the
massive, ongoing investment in network architecture by companies such
as MCI Worldcom (WCOM: news, msgs) and AT&T (T: news, msgs).
This build-out of broadband capability -- whether through satellite, cable,
optical or otherwise -- enables companies such as Real Networks
(RNWK: news, msgs), Yahoo!, Macromedia (MACR: news, msgs) and
Net2Phone (NTOP: news, msgs) (in addition to the traditional telcos) to
provide a broader array of Internet-based services more effectively and at
a lower cost while avoiding costly, direct investment in building the
network backbone.
Telecommunications, wireless and fiber optics equipment companies have
been some of the year's best performing groups. Companies like Lucent
(LU: news, msgs), JDS Uniphase (JDSU: news, msgs) and Nortel (NRT:
news, msgs) have all benefited from rising investment in network
infrastructure. Barring any unforeseen interruption in business spending, I
expect to see strong demand, rising order backlogs and higher equity
prices for these groups in the coming months. Investors should therefore
remain overweighted in these areas. |
