Tech mergers and acquisitions are heating up and they are reaching levels not seen since the days of the 2000-01 tech bubble. As the tech-heavy Nasdaq Composite index hits its highest levels since 2000, could this be a sign of another peak for tech?
Since the start of the year, over $174 billion in announced tech deals have been announced, according to Thomson Reuters. But Chantico Global's Gina Sanchez said the high M&A volume alone doesn’t signal a new bubble, although there are worries.
“You are definitely seeing it in segments of the market where you see valuations that just are pricing in irrational exuberance,” said Sanchez, a CNBC contributor. “That tends to be a sign that there’s too much money.”
Sanchez cites biotechs, Amazon, and Tesla as examples where valuations have gotten frothy. “We see plenty of examples where we see some pretty hefty valuations in the tech space—well over 50 times, 100 times forward earnings,” she said. The fundamentals here to me look stretched.”
Todd Gordon, founder of TradingAnalysis.com, is not as down on the Nasdaq’s health, but he nonetheless sees a correction ahead based on the index’s charts.
“This is a new Nasdaq compared to 2000,” said Gordon, a CNBC contributor. Whereas the majority of the index’s composition was in tech back in 2000, today it is down to the low 40 percent range. Stocks like Cisco were leading the charge 14 years ago—some with valuations at triple-digits times forward earnings. But today’s Nasdaq is led by Apple, a stock trading at a relatively modest 15 times forward earnings.
Gordon believes technicals on the Nasdaq are just healthy—and may even help it break above its all-time highs, but it won’t be a smooth ride.
“Technically, it looks solid,” he said. “I think we’re in a longer-term uptrend. I do think we eclipse those 2000 highs.”
To be sure, the Nasdaq is hitting the upper bounds of an uptrend Gordon sees as beginning in 2011. “We do need to reset a little bit and test the lower end of that channel, all within that longer-term uptrend,” he said. “Unfortunately that equates to about a 20 percent decline.”
Gordon backs up his analysis by charting the Nasdsaq’s Average Directional Index (ADX), which measures the trend’s strength.
In 2011, when the ADX was between 35 and 40, a 20 percent decline followed shortly after. “Now we’ve just seen another strong ADX reading up around 40 and we’ve yet to see that pullback,” Gordon said. “That pullback should equal that May 2011 correction of about 20 percent all within the context of the longer-term uptrend.”
To see the full discussion of the Nasdaq Composite index, with Sanchez on the fundamentals and Gordon on the technicals, watch the above video.