Bubble Land
Together with 800° GO
The end of the tech bubble is incoming. Nasdaq is down 21% year-to-date. The famed Ark Innovation ETF is down 50%. Valuation multiples are collapsing for any company that doesn’t generate a meaningful amount of free cash flow.
Most high flying tech stocks are down 70-90% from their all time highs:
TSLA: -27%
ZM: -83%
ROKU: -81%
TDOC: -80%
COIN: -64%
SQ: -64%
EXAS: -61%
U: -63%
TWLO: -73%
CRSP: -74%
PATH: -78%
SPOT: -70%
NTLA: -71%
SHOP: -74%
BEAM: -69%
PD: -47%
FATE: -71%
DKNG: -80%
HOOD: -86%
SGFY: -61%
Despite the fallout and total implosion of these once high flying tech stocks, cash flow and earnings multiples still remain at nosebleed levels. As an example, Tesla is trading at a P/E ratio of 117x. Shopify has a 129x EV/EBITDA. Block Inc. has a EV/EBITDA of 173x!
These valuation levels imply that investors (“speculators”) are betting high growth continues for years to come. Tech valuations are built on ultrahigh growth rates and hopes and dreams. It is a pile in mentality where everyone bids up equity prices on hopes they can dump it at a higher price in the future.
Here is the question that I propose to all investors new to the game. What would you rather buy:
Company A$57 billion market cap
$5 billion cash, $5 billion debt for $57 billion enterprise value
$17.5 billion revenue
$333 million EBITDA
$166 million net income
Company B$67 million market cap
$57 million cash, $3 million debt for a $13 million enterprise value
$135 million revenue
$13 million EBITDA
$10 million net income
The answer to this question should be easy for anyone who has been closely following my newsletter. With Company A you are betting on hopes, dreams and the future that endless growth will eventually catch up to the sky high valuation.
With Company B, you make all of your money back in one year and are protected by a massive cash balance should earnings in the future disappoint. The margin of safety is large here and should be attractive to any investor who is interested in owning actual businesses, not hopes and dreams.
The goal of all investors is to buy low and sell high. Every talking head on CNBC spews this. Every FinTwit account jokes about it. Every hedge fund manager attempts it. But few actually practice the art of buying low and selling high.
My sense is that most individuals don’t know what buying low and selling high really means. Most investors focus on the stock chart when attempting to buy low and sell high. But stock charts are not really what buying low and selling high really means.
Buying low means buying a company for as cheap of a valuation that you can get. My goal with every stock I purchase is to buy it for significantly under its intrinsic value. I calculate intrinsic value differently with every company but in the end I tend to look for situations where:
Hard assets (buildings, land and equipment) are worth more than the enterprise value
The company is trading under its cash and working capital (hard to find in a bull market)
Hidden assets (growing segments that are spitting off cash flow and revenues hidden by a legacy depleting asset)
Sometimes there are other intrinsic value calculations that I attempt but these are the three key ones that I look for. When I find a great stock idea I then try to buy it meaningfully below the intrinsic value (25-50%) below what I think fair value is.
I don’t rely on growth. I don’t forecast a new technology development. And I don’t buy on hopes and dreams. I buy undervalued assets that Mr. Market does not want to own.
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