Thirty years ago, in March 13th, 1986, a little company named Microsoft (MSFT) went public. Split adjusted the IPO price was below 10 cents!. At the time the Nasdaq Composite (CCMP) was trading very near 300. MSFT has risen 65,000% since, the CCMP has risen 1500%. Yet the two charts look identical:
Think about how much poor performance by thousands of publicly traded companies has been masked over the last three decades stocks like MSFT. Many of those companies became outdated and were soon to be outdone by the likes of Amazon.com (AMZN), Facebook (FB), Alphabet (GOOGL) and now Salesforce.com (CRM).
Despite the CCMP having just made new all time highs, MSFT remains below its December 1999 highs. But I think it’s safe to say all time highs are coming to a theater near you. The move to new CCMP highs included AMZN’s 350% gains from its 2012 lows, FB’s 250% gains since its 2012 IPO, and GOOGL’s 230% gains from its 2012 lows for this out-performance. These three stocks, all near all time highs, have a combined market cap of $1.3 billion. I am stating the obvious, but a handful of mega-caps ARE the Nasdaq.
There’s an easily defensible case to be made why MSFT will make a move back towards its all time highs. After all, with its $450 billion market cap the stock sports a 2.5% dividend yield, $60 billion in net cash on their balance sheet, trailing 12 month sales of $92 billion and almost $17 billion in net income. The stock trades 20x expected fiscal 2017 eps which may grow 3 to 4% on 1 -2 % sales growth. But no investment is ever a no brainer, so investors buying MSFT here are likely looking out to fiscal 2018 where consensus expects eps growth to be double digits (11%) for the first time since 2011.
Mega-cap domination in the CCMP is only getting more pronounced, especially when you consider the $150 billion in semiconductor M&A since the start of 2015. That’s dramatically reduced the amount of publicly traded semi companies. Recent cloud deals like MSFT’s $26 billion all cash bid for money losing LinkedIn (LNKD), or Oracle’s (ORCL) $9.2 inside deal for Netsuite (N), is not being offset by the anemic ipo market. That’s a direct result of the newfound ability of tech unicorns to tap private funding in previously unheard of ways and amounts.
If you are a public tech investor, and have no access to Uber, Lyft, Snapchat or AirBnB stock then all you can hope for is M&A by mega-caps of those famous Unicorns. This is also the only way to to justify historically high valuations for many of the mature cyclical tech names. The other option is to pile into AMZN and FB and hope they grow into their valuations. Both are fine strategies on the way up, but will become a shit-show on the way down. Fewer public companies overall and more concentration through M&A at the top means things get a little more interesting when people turn and head for the doors.