Nasdaq 3000 Owes More to the Infrastructure Builders Than the Traditional Darlings

Often overlooked, the firms building bandwidth on the Net are constituting a greater percentage of the Nasdaq.
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SAN FRANCISCO -- More than

Intel

(INTC) - Get Report

, more than

Microsoft

(MSFT) - Get Report

, more than mighty

Dell

(DELL) - Get Report

, the force that has propelled the

Nasdaq Composite Index

up 1,000 points in 16 months is bandwidth.

The Nasdaq's rise to prominence has always been powered by tech issues. While far from a pure technology index, the Nasdaq has become the market's benchmark for tech stocks, thanks largely to the dominance of large-caps such as Microsoft, Intel and Dell, which together make up about one-fifth of the Nasdaq's market cap.

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But the strongest force behind the Nasdaq's 1,000-point rally -- to 3000 Wednesday from 2000 in July 1998 -- hasn't come from those companies. Rather, the strongest growth has come courtesy of the companies -- including many small newcomers -- that help build and run the communication networks. According to a

TheStreet.com

analysis of the 100 largest Nasdaq members, the combined market caps of these companies counted for at least 22% of the Nasdaq on Wednesday, up from about 15% in July 1998. Their rising profile underscores the key role the bandwidth sector is playing in the robust U.S. economy.

Network-infrastructure leader

Cisco

(CSCO) - Get Report

has gained 124% since the Nasdaq first reached 2000, while wireless-equipment supplier

Qualcomm

(QCOM) - Get Report

has increased 801%. By contrast, the Nasdaq itself has risen 50%, while Microsoft is up 57%, Intel is up 89% and Dell is up 48%.

Cisco now constitutes 5.2% of the

Nasdaq National Market

(which overlaps with the Nasdaq Composite but excludes some small-cap names), up from 4% when the Nasdaq Composite first pierced the 2000 mark in July 1998, according to

FactSet Research Systems

. Together, Microsoft, Intel and Dell now speak for 19% of the Nasdaq National Market, compared with 20% in July 1998.

Some smaller bandwidth stocks have chalked up even more impressive gains since June 30. For example, the optical-network supplier

JDS Uniphase

(JDSU)

has tacked on 598%, and the phone and data carrier

McLeodUSA

(MCLD)

has added 137%.

McLeodUSA was one of the Nasdaq's biggest laggards back in July 1998. At that time, online merchant

Amazon.com

(AMZN) - Get Report

,

Yahoo!

(YHOO)

and computer-maker Dell were leading the charge.

The change in sentiment since then reflects fundamental changes in the Internet-crazed economy. Increasingly, investors are latching on to stocks that benefit from the raw growth of networks that will carry Internet traffic and eventually voice signals. Bandwidth has become their sure bet.

"Data are being generated and transmitted and stored at much higher rates and in much higher volumes than people dreamed of just years ago," says Tom McManus, equity portfolio strategist with

Banc of America Securities

. As investments, these purveyors of bandwidth likely will prove "more sustainable than the initial surge of the Internet companies."

As of Sept. 1, 64 million U.S. households are using the World Wide Web, up from 56 million in February, according to estimates from market researcher

PC Data Online

.

"I think the proliferation's going to be a lot greater than we thought," says Phillip Coburn, global tech strategist with

Warburg Dillon Read

. Coburn sees several trends at work. First, executives are pressuring one another to get hip to the Net. Second, companies themselves are using the Internet to grow more efficient and to expand internationally. And third, people are using the Internet as a way to improve their quality of life, particularly in the U.S.

To be sure, some of the Nasdaq's long-standing leaders continue to perform well. Shares of

Sun Microsystems

(SUNW) - Get Report

and

Oracle

(ORCL) - Get Report

have both more than tripled since the Nasdaq's 2000 level.

Still, many of the smaller stars are bandwidth stocks.

Nextel

(NXTL)

, which provides wireless services, now constitutes 0.6% of the Nasdaq, while the debutants

Sycamore Networks

(SCMR)

,

Akamai

(AKAM) - Get Report

and

Juniper Networks

(JNPR) - Get Report

together make up more than 1% of the Nasdaq National Market despite being recent entrants with IPOs this year.

And some expect more bandwidth stocks to grow as well. Equity analyst James Henry with

Bear Stearns

expects two lower-profile telecom-service companies,

Intermedia

(ICIX)

and

PSINet

(PSIX)

, to attract investors again and start pulling their own weight on the Nasdaq. (Bear Stearns has acted as banker for both companies.)

"The new telecom entrants are taking market share from the incumbents, and with all of them participating in data growth, you have a humdinger of a growth story," Henry says.

Staff reporter

Scott Moritz contributed to this story.