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Looking Decades Ahead: The Nasdaq-100 Is The Economy's Tech Engine

Thomas Edison was nicknamed “the Wizard of Menlo Park” for his New Jersey-based laboratory, which was an epicenter of invention. Edison’s laboratory and companies not only produced great inventions but helped to produce other great scientists as well. Edison’s rival Nikola Tesla was once a Continental Edison employee.

The state of innovation today is every bit as strong as it was in Edison’s day, but it is more diffuse. There’s not a single laboratory one can point to right now as a centralized locale of invention and technological advancement.

If you were to ask someone to name the world’s technology leaders that characterize the current era, what names would you hear? Likely you’d hear Steve Jobs, Bill Gates, Elon Musk, and Mark Zuckerberg. All of these leaders share some things in common: a drive to succeed, a strong work ethic, a very savvy business sense, and, maybe most importantly, a very prescient view of the times ahead in terms of technology. These companies have come to define technology in the modern world, but they did not all spring from a single laboratory or place. Not one single school or former employer binds them all.

But all of these companies do share one location in common, though it’s not a brick-and-mortar structure like Edison’s Menlo Park or Tesla’s South Fifth Avenue laboratory. All of these companies are members of the Nasdaq-100 index.

There is virtually no one living in the developed world that does not have daily contact with the Nasdaq-100 whether they realize it or not. The most common way people seek information is to “Google” it. Would holiday shopping be recognizable now without Amazon? Has anyone living in civilization not used a Microsoft product in their lifetime? Could you talk about coffee culture today without uttering the word “Starbucks?” Would our concept of private space travel or electric cars be the same without Tesla?

The Nasdaq-100 index serves as a channel for companies engaged in innovation, and the companies that are in the index today not only represent the top innovators in today’s market, they are working to ensure they are the most innovative companies in tomorrow’s market. It is not enough that they enjoy a reputation as innovators today. Being comfortable with one’s history is a sure way to fall behind the times. The Nasdaq-100 companies are a case study in getting in front of technology so as not to fall by the wayside.

Companies in the index are on the leading edge of technology development in the world and the numbers prove it. According to data compiled by Nasdaq using Bloomberg and FactSet, the average Nasdaq-100 company spends an average of $1.7 billion per year on research and development and has an 11.6% average trailing 12-month R&D expense as percentage of sales. This is more than double what the average S&P-500 company spends, which is an average of $684 million per year and a 4.7% average trailing 12-month R&D expense as percentage of sales.

The world has taken note. Forbes lists its 100 most innovative companies every year, and in 2016 the Nasdaq-100 companies comprised nearly a quarter of all those listed with 23 out of 100 most innovative companies. When you look at the top of the list, the index becomes an even more dominant force, with nine out of the top 20 and six out of the top 10. Nasdaq-100 companies are 60% of the top 10 most innovative companies of 2016.

Forbes more recently published a list of the 50 most admired companies. While the mix was a bit different, Nasdaq-100 companies comprised six of the top 10 most admired companies in the world, and 11 of the top 20 most admired companies in the world.

But being loved today is no guarantee of success tomorrow or longevity next year. History is littered with great powers that grew comfortable in their role and failed to plan ahead. What makes Nasdaq-100 companies stand out from the packs of the past is their mindset of looking towards the future. So let’s pull back the curtain a little bit. Let’s take a deep dive into just what companies are at this forward-thinking vanguard and what steps they are taking to make sure they stay there. Read these articles for more:

The industry of innovation

People often think of large manufacturing and industrial production as innovating only in terms of streamlining existing production. They ask when robots may be taking more jobs but don’t look to see how else industrial companies may be making significant changes to their markets. While Ford’s assembly line will continue to be changed with the times, there is significant change in the industrial sector that is adapting to a culture that wants more renewable resources, more responsibility, and continuous innovation.

Among Nasdaq-100’s most-cited innovative companies is Tesla (TSLA), the producer of electric cars and ranked the #1 innovative company by Forbes for two consecutive years. Named for inventor Nikola Tesla, the electric automaker started a new era in the auto industry. Tesla is working to change the way people drive, creating a network of charging stations for their all-electric cars and has set ambitious goals that have baffled analysts and industry watchers time and time again. Its innovation in its batteries alone has helped spur the auto industry into a new electric era.

It also managed to build a mass-market vehicle with aluminum profitably, an auto-industry first. But it also created an innovative way to take advantage of the hype surrounding the release of its new vehicles by taking reservations on cars in advance of their production. With these reservations requiring a $1,000 deposit, Forbes notes that the pending release of its Model 3 brought the company a cool $400 million in capital. It is working to pioneer not only self-driving cars but self-driving trucks that can streamline logistics and delivery services worldwide. And Tesla is also known for its SpaceX subsidiary, which builds rockets and spacecraft and has announced ambitions to colonize Mars.

Like its namesake inventor, Tesla has made bold innovation its raison d’etre.

Growth trajectory

The Nasdaq-100 index has a great history of growth and is on another strong growth trajectory. Since its inception in 1985 it climbed steadily until the technology wave of the 1990s sent on a spike that dropped along with the dot-com era in the early 2000s. But the story since then has been one of stronger, steadier growth. Since late 2009 it has been climbing and now has a value proposition equal to that of its dot-com era boom. What makes things different today is that the index is a diverse and innovative in ways that set a new and exciting precedent. Starting at a $58 billion market cap in February of 1985 that comprised 3% of the total NYSE market cap, the Nasdaq-100 grew to more than $6.5 trillion in total market value representing 28.5% of the NYSE market cap by June 2017.

And the growth is poised to continue with the index dominating its competitors. The sales growth of the Nasdaq-100 companies is much higher on average than other indexes (16.2% for the Nasdaq-100, 5.5% for S&P 500 and -0.9% for the Dow). The Nasdaq-100 has eight companies with sales growth that has averaged more than 50% over the last three years. The S&P 500 had six such securities among its ranks and Dow Jones Industrial Average has no such components.

With technology powering and setting the agenda for growth, the Nasdaq-100 is the center of a lot of technology that is changing our world. The Nasdaq-100 will continue to be the economy’s epicenter of innovation both in terms of technology and in the way companies work. The companies that stand on the index today are determined to be leading the pack from the index 10, 20, 30 years from now and beyond.

With a wide diversity of companies in the index, the one thing that they all have in common is the drive to innovate. Having innovation at the center of corporate culture is perhaps the single common factor you will find in every single member of the index. Nasdaq-100 member companies know that the way the world looks two decades from now will be very different, and refuse to be caught off guard as the world changes.

As a result, companies can be seen as value destroyers via “disrupting” or “outcompeting” the established companies in various sectors. The upshot here is that failing to invest in the innovative Nasdaq-100 companies is not just foregoing potential value creation but exposing oneself to risk of value destruction by heavily investing in conventional autos (self- driving cars), retailers (e-commerce), media companies (digital advertising, cord cutting), etc. The growing ambitions of the Nasdaq-100 innovators are at the expense of older, slow- moving companies.

History is made by those taking action today and looking to the future. History will note that by all measures the Nasdaq-100 is a focal point of innovation setting the stage for the world of tomorrow.

Sources: Nasdaq Global Index Research, FactSet, Bloomberg.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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