Apple’s Nasdaq-100 Weighting Drops as 1996-97 Losses Resurface

April 05, 2011, 1:19 PM EDT

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By Kana Nishizawa and Inyoung Hwang

April 5 (Bloomberg) -- Apple Inc. is getting punished again for its flirtation with bankruptcy in the late 1990s.

Nasdaq OMX Group Inc. reduced the iPad and iPhone maker’s share of the Nasdaq-100 Index’s value to about 12.33 percent from 20.49 percent. It will remain the biggest stock in the gauge, which serves as the basis for the third most-traded U.S. exchange-traded fund in 2011. Microsoft Corp., Oracle Corp., Intel Corp. and Cisco Systems Inc. had their weighting in the 100-company index increased the most.

The exchange operator revamped the index in December 1998, reducing how much of the measure’s value its biggest companies represented, to meet U.S. Internal Revenue Service rules and permit the creation of the ETF, now known as the PowerShares QQQ Trust. At the time, Apple shares weren’t valuable enough to have the curb applied following the Cupertino, California-based company’s $1.86 billion in combined net losses in 1996 and 1997.

“Apple’s grown a ton since 1998 and its weighting’s been allowed to become too large a portion of the index,” said Thomas Garcia, head of equity trading at Santa Fe, New Mexico- based Thornburg Investment Management Inc., which oversees about $80 billion. “To have a company be 20 percent of your index isn’t an accurate reflection of what’s actually happening in that market. Nasdaq wants its index to be diversified.”

Market value wasn’t the only consideration after the 1998 change when assigning weights to companies in the Nasdaq-100, which today gets 60 percent of its value from technology companies. The rule change more than a decade ago added an adjustment factor to drive down the representation of stocks such as Microsoft, Cisco, Intel and Dell Inc.

Value Reversal

Apple’s weighing has been allowed to increase without restraint because Nasdaq OMX didn’t apply a curb 12 years ago. The change took effect on Dec. 21, 1998, when Apple shares were valued at $4.76 billion. Microsoft, Cisco, Intel and Dell were worth $342.4 billion, $141.9 billion, $195.2 billion and $86.9 billion, respectively.

Since then Apple shares surged 3,779 percent through yesterday, making them the third most-valuable shares in the world at $314.3 billion. Over the same period, shares of Microsoft, Cisco, Intel and Dell declined 26 percent, 25 percent, 35 percent and 58 percent, respectively.

Nasdaq OMX said today that Microsoft and Oracle’s allotments in the index will more than double when the change takes effect after exchanges close on April 29 -- to 8.32 percent from 3.41 percent and to 6.68 percent from 3.32 percent. Intel will climb to 4.2 percent from 1.75 percent and Cisco will rise to 3.66 percent from 1.56 percent. In total, 82 of the 100 index securities will drop in weight, Nasdaq said.

More Stable

“The overall basket is less impacted by the goings-on at Apple, so the basket post-April 29 will outperform an Apple selloff much better than before,” said Dave Lutz, head of exchange-traded fund trading and strategy at Stifel Nicolaus & Co. in Baltimore. “In the long run it will create a more diversified, stable representation.”

Apple’s weighting in the gauge is currently more than six times that of the second-biggest constituent, Redmond, Washington-based Microsoft, while its market value is only 46 percent larger, according to data compiled by Bloomberg.

Apple has reshaped itself since the company purchased NeXT Software Inc. in 1997. Steve Jobs formed NeXT in 1985 after he was fired by Apple. He rejoined the company after the deal and became chief executive officer -- first on an interim basis and later permanently -- in September 1997.

Jobs transformed the company, developing Mac OS X as a replacement for the original Macintosh operating system and creating the iPod, iPhone and iPad. The company was profitable every year since, except 2001, growing net income to $14 billion in 2010 from $309 million in 1998.

Apple shares fell less than 0.1 percent to $341.09 at 1:10 p.m. in New York, and the PowerShares QQQ Trust rose 0.4 percent to $57.47.

“You won’t choose not to buy Apple if you like it because it’s being reweighted,” said Mike Shea, a managing partner and trader at Direct Access Partners LLC in New York. “If you’re an investor, it doesn’t really change the process.”

--With assistance from Alexis Xydias and Andrew Rummer in London, Cornelius Rahn in Frankfurt, Darren Boey in Hong Kong and Jeff Kearns in New York. Editors: Nick Baker, Joanna Ossinger
To contact the reporters on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net
To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Darren Boey at dboey@bloomberg.net