An Abney and Associates International Blog: As the Dow Soars, How High Can Tech Stocks Go?

Last Friday, the Dow Jones Industrial Average — the benchmark stock index of America’s blue chip companies – closed above 14,000 for the first time since the financial meltdown sent the U.S. economy into the worst crisis in decades. The continued resurgence of the U.S. auto industry and growing optimism about the overall economy helped propel the Dow above the psychologically important 14,000 point level. The surging Dow is an indication of the increasing financial health of the largest American companies, a bright spot in an otherwise shaky U.S. economic recovery, particularly with respect to unemployment.

America’s blue chip firms — including industrial giants, banks, and auto companies — are healthier than they’ve been in years. But what about the largest U.S. tech companies? Like the other major stock indices, the tech-heavy Nasdaq index is at or near multi-year highs. On Friday alone, the Nasdaq rose 1%, nearly touching the index’s five-year high, which it hit last September, driven in part by tech juggernaut Apple, which had just released the iPhone 5. But Wall Street sentiment has soured on Apple in recent months, somewhat tempering the Nasdaq’s continued ascent.

How high can tech stocks go? Given Apple’s size — it’s the largest tech company in the world — it makes sense to begin any forward-looking evaluation of the Nasdaq with the Cupertino, Calif.-based cash machine. Apple constitutes about 12% of the Nasdaq’s valuation, and there’s no question the company’s recent stock swoon has placed a drag on the tech-heavy index. Let’s take a look at Apple and three other important Nasdaq companies.

Two weeks ago, for the third consecutive quarter, Apple fell short of analyst estimates, sending the company’s stock down 10% in after-hours trading, wiping out nearly $50 billion in shareholder value. Although it reported record financial results, Apple’s slowing growth rate has spooked investors, who are growing increasingly concerned about the next stage in the company’s epic story.

Can Apple maintain its heretofore astonishing growth-rate on the back of existing products like the iPhone and the iPad or does the company need new, breakthrough products? Investors seem to think the latter, which explains why its stock has declined 26% over the last six months. As the largest single component of the Nasdaq index, Apple’s continued growth is crucial for the tech-heavy stock tracker.

If there’s a true standout among big tech stocks, it’s clearly Internet titan Google, which hit a record high on Friday, closing up 2.6% to $775.60, the highest value since the company went public in August 2004, according to Bloomberg. As rival Apple has stumbled, Google shares have increased 30% over the last year. Google now has a market capitalization of $250 billion, with $50 billion cash on hand. Not bad for a 15-year-old academic project.

Last month, Google reported strong revenue growth, as the online advertising market keeps shifting away from traditional ad platforms — including print — and toward Internet-based marketing. This trend will continue indefinitely, and as the world’s largest Internet advertising company, Google is perfectly poised to capitalize here.

Another bright spot for the Nasdaq is social media colossus Facebook. After a rough few months following the company’s controversial initial public offering, Facebook shares have soared over 30% in the last three months. Last month, Facebook delivered a strong earnings report, with mobile revenue surging from 0% to 23% of total revenue in just one year. That’s another figure that will only increase.

“Today there is no argument,” Facebook CEO Mark Zuckerberg told Wall Street analysts. “Facebook is a mobile company.” The company’s overall ad sales growth is booming, increasing in the fourth quarter by 41% to $1.3 billion. As the largest of the new class of Nasdaq’s stocks, Facebook’s continued success is crucial for the tech-heavy index, which endured withering criticism of its handling of the IPO.

If the Nasdaq has a compelling underdog story right now, it’s a company called Blackberry, formerly known as Research in Motion. (Why it took so many years for the company to make this obvious branding change is beyond me.) Practically left for dead just six months ago, Blackberry is up a whopping 49.6% over the last three months. Last week, Blackberry unveiled its long-awaited Blackberry 10 operating system, and unveiled two slick-looking new Blackberry phones.

Taking several pages from the Apple/Google playbook, Blackberry announced a marketplace for music and movies, and an app catalog that will include more than 70,000 apps at launch, as TIME’s Techland reported. Blackberry shares are still down over 80% since their 2008 peak, but if the company can launch a product that genuinely competes with Apple and Google, that will be good for the tech sector, because competition spurs innovation, and innovation drives the Nasdaq.

It’s important to remember that the health of stock market indices does not necessarily correspond with the overall health of the U.S. economy. In fact, there’s frequently little connection at all. Stock markets are driven by corporate profits, which seem increasingly disconnected from the health of the U.S. consumer, a key driver of the economy. Still, rising corporate revenues, profits, and stock prices are an unambiguously good sign for the U.S. economy. And tech companies are a key element of overall U.S. corporate health.

What drives tech revenues and profits? Consumer and corporate spending. There’s no doubt that investors have grown skittish about Apple, which is weighing on the Nasdaq. But overall, U.S. stock market indices and other key economic measures appear to be contributing to a virtuous cycle — however halting — that will ultimately benefit investors.

Source: http://business.time.com/2013/02/04/as-the-dow-soars-how-high-can-tech-stocks-go/