1999 again?

[Guest ajc]

 

A comparison below between the relative P/S ratios for some hot tech IPOs together with sales growth for 1999 -

 

eBay              117x (724%)

Yahoo            111x (188%)

Cnet                40x ( 95%)

AOL                  33x  (500%)

Lycos                28x (140%)

Amazon            23x (312%)

 

And 2019 -

 

Beyond Meat   83x (170%)

Zoom           61x (118%)

Slack           41x   (76%)

Wework*         34x (103%)    *implied at $47B valuation with 30% first day pop

Shopify         28x   (59%)

Uber               7x   (43%)

 

 

Now divide those P/S multiples by revenue growth, and you get:

 

1999 -

 

Yahoo                59x

Cnet                  42x

Lycos                20x

eBay                  16x

Amazon              7x

AOL                    6x

 

And 2019 -

 

Slack           53x

Zoom           51x

Beyond Meat   48x

Shopify         47x

Wework           33x

Uber             16x

 

 

Anyway, I'm sure it's nothing. My guess is now is the perfect time (since there's no feeling of mass euphoria) to take out that second mortgage and really load up on these cheap tech IPOs that are so hot right now.

Keep in mind Barron's says this is not the same as the Dotcom era, Businessweek says this rally won't stop, Wall Street's biggest bear has now become bullish, and Bloomberg says interest rates will never rise again.

So, we're set. We mastered market cycles and reversions to the mean, meaning it's plain sailing from here on in.

To sum up, I'd like to say that tech IPO stocks have reached what looks like a permanently high plateau.

 

[DooDiligence]

 

Folks, if you're focusing on tech IPO valuations then great. On the other hand, if you're discussing the benefits of crypto or monetary theory then kindly take those conversations to their respective threads so this discussion doesn't get derailed.

 

Off piste, je suis désolé.

[RuleNumberOne]

I went into a Fidelity branch yesterday. There was a 70-year old woman waiting in the lobby. A financial adviser came out to greet her. She told the adviser that he could tell her whether she would be solvent when she was 90.

 

I had always wondered what sort of people pay for a financial adviser. If these advisers put old ladies into index funds - as in the Russell 1000 index, starting next week they would be putting their money into the new IPOs.

 

There is a long list of IPOs aimed for the rest of this year. There is disbelief in Silicon Valley at the valuations. The feeling is, "if we had known the IPO market would change so suddenly, we would have IPOed already. Wait for us." Just a year ago, none of these companies thought they could ever IPO.

[Spekulatius]

Once upon a time in tech:

https://seekingalpha.com/article/4271574-upon-time-tech

[jschembs]

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

 

Here's the data. I also excluded a few names that recently reported earnings where CapIQ hadn't updated their LTM financials, but the impact is insignificant.

 

More food for thought - given the prevalence of negative earnings / FCF constituents, EV/sales perhaps more enlightening? At least you can include more of the constituents in the data set.

 

[Spekulatius]

Race to the bottom continues academically:

https://nypost.com/2019/06/30/laffer-federal-reserve-shouldnt-be-independent-from-white-house/

[DooDiligence]

Race to the bottom continues academically:

https://nypost.com/2019/06/30/laffer-federal-reserve-shouldnt-be-independent-from-white-house/

 

That guy's appropriately named.

[Liberty]

 

[Cigarbutt]

Race to the bottom continues academically:

https://nypost.com/2019/06/30/laffer-federal-reserve-shouldnt-be-independent-from-white-house/

Opinion: The Fed should be as independent as democratically possible and should lean to be counter-cyclical.

As far as Mr. Laffer's credibility and his ability to spot bubbles (1999 dot-com or otherwise), a retrospective look may be helpful. Included here is a video that is kept in my post-mortem file of the 2007-9 episode. A penny was gained on that unsustainable housing price bet.

 

Mr. Laffer has contributed to the supply side and trickle-down debate and some have suggested that his most important contribution could be summarized on a napkin:

https://americanhistory.si.edu/collections/search/object/nmah_1439217

 

Given the opinion that I have about the present Federal Reserve policy, I would say that the dot-plot scheme that they use to make decisions could be reproduced on a piece of toilet paper and bubbles, by definition, are an after-the-fact phenomenon.

[jschembs]

 

 

I'd certainly agree the S&P is not nearly as frothy as the R2K or R3K.

 

And of course, use of forward earnings this late in a cycle should be taken with a grain of salt. Look at forward earnings in mid-2007 through 2008.

 

https://www.yardeni.com/pub/sp500trailpe.pdf

[Spekulatius]

Yeah, the market in 2007 was even cheaper... Of course interest rates were higher back then as well as other issues.

[jschembs]

I'm more so talking about nearing inflection points in earnings where forward multiples become far less predictive.

[CorpRaider]

Yeah, as we all know the forward multiple is going to be really, really wrong when/if GDP declines and corporate profits as a percentage of GDP/margins decline at the same time. 

[Liberty]

I'd certainly agree the S&P is not nearly as frothy as the R2K or R3K.

 

And of course, use of forward earnings this late in a cycle should be taken with a grain of salt. Look at forward earnings in mid-2007 through 2008.

 

https://www.yardeni.com/pub/sp500trailpe.pdf

 

It's not even the same SP500 anyway. Look at the composition of the index during different periods, and then ask yourself if some businesses are worth higher valuations than others.

 

Is it worth the same multiple when you're railroad and heavy industrial and commodity-heavy as if you're tilted toward capital-light, high ROIC businesses (healthcare, software, services, advanced IP-based engineered products, etc).

 

There's also the globalization aspect. 60 years ago, most of the US-listed companies did most of their business inside one country. Now a lot of the biggest companies in the index are global and are capturing some of the rapid growth in places like Asia..

 

Anyway, comparisons are a lot harder to get right than most people think.

[SHDL]

I posted this on another thread too, but there’s a very recent research piece by Jesse Livermore that speaks to some of this:

 

https://osam.com/Commentary/the-earnings-mirage

 

The author basically comes up with an improved measure of shareholder’s equity or book value (which he calls “integrated equity” [iE]) and shows that the P/IE ratio has historically been an astonishingly good predictor of 10-year forward returns for the S&P 500.  Currently the ratio stands where it was in the late 90s (but below its 2000 peak), and suggests that future total returns will be in the low-mid single digits. 

 

Of course this time may be different for some reason, but given how well this and several related predictors have worked for decades, I’m very skeptical. 

 

BTW I actually like this setup as I think it bodes well for active value investing. 

[gfp]

Jesse Livermore eh?  The boy plunger lives!

[SHDL]

Jesse Livermore eh?  The boy plunger lives!

 

He certainly deserves a great pseudonym.

[jschembs]

I posted this on another thread too, but there’s a very recent research piece by Jesse Livermore that speaks to some of this:

 

https://osam.com/Commentary/the-earnings-mirage

 

The author basically comes up with an improved measure of shareholder’s equity or book value (which he calls “integrated equity” [iE]) and shows that the P/IE ratio has historically been an astonishingly good predictor of 10-year forward returns for the S&P 500.  Currently the ratio stands where it was in the late 90s (but below its 2000 peak), and suggests that future total returns will be in the low-mid single digits. 

 

Of course this time may be different for some reason, but given how well this and several related predictors have worked for decades, I’m very skeptical. 

 

BTW I actually like this setup as I think it bodes well for active value investing.

 

Quite the tome from Mr. Livermore, thank you.

 

Interesting that for all of that work, he ends up with a measure that largely tracks CAPE (which seems to be discarded as a useless metric by the new guard).

[CorpRaider]

I haven't read the new piece yet, but I caught the podcast episode with Patrick O-shag-hennessy and he talked about some of his prior CAPE adjustment articles.  I had basically the same takeaway/impression as you:  when I read them, I filed under "reinforces legitimacy of CAPE/critiques are nits."

 

I think I remember Buffett talking about how depreciation usually understates required cap-ex, in one of his answers dealing with the failings of EBITDA (think it was somewhere around 2000 in one of the annuals) (and also maybe in "how inflation swindles....haven't read in a while"). 

 

Will be interested to read Livermore's article, but when they said that was the takeaway I was kind of less enthused; could be interesting if they talk about amortization of intangibles though.  I wonder if those aren't generally overstated; I guess they are in the huge winner, quality-compounder-bro portfolios.

[RuleNumberOne]

Yeah, good point Spekulatius. If the bubble is in bonds or cloud stocks (i.e Russell 1000) or housing, no point in looking at the S&P 500.

 

Italian 2-year at 0%!

https://www.bloomberg.com/opinion/articles/2019-07-02/italy-proves-how-markets-have-abandoned-logic?srnd=premium

 

"Let this sink in for a minute: Yields on two-year Italian government bonds briefly fell below 0% on Tuesday. That's right - for a moment, investors decided it was just fine to pay Italy for the privilege of lending it money, even though barely a month ago the country was on the verge of a fiscal crisis so bad some wondered whether it would be need to leave the euro zone. It matters little that yields ended the day on the right side of zero at 0.02%, but even that shows how the “greater fool” theory in markets has gone too far.

 

What makes the developments in Italy’s bond market even more shocking is that at Baa3, its debt is rated just one step away from junk status by Moody’s Investors Service."

Yeah, the market in 2007 was even cheaper... Of course interest rates were higher back then as well as other issues.

[RuleNumberOne]

Credit risk doesn't exist anymore in Europe.

 

Greece 10-year yield at 2.14%. The same as the US 10-year.

 

BofA CEO says US yields are low because Europeans are buying up all the US bonds to escape negative rates. Can't blame them.

 

Germany applied retroactive rent freezes to control inflation in Berlin (aka wealth confiscation)

 

 

[CorpRaider]

Carry = EAFE stocks + U.S. Bonds  :o

[stahleyp]

For the guys that think this is 1999, can you please share your performance numbers over the past 5 and 10 years?

[RuleNumberOne]

The 5-year return in my wife's IRA accounts is 38% (I invest the money.)

 

My own IRAs have moved between WellsFargo, BofA-ML, Schwab to get a mortgage rate reduction, and on top of that I have Fidelity, Vanguard accounts that have been moved and merged etc. But my returns should not be too different (same portfolio contents and decisions.)

 

Actually, upon checking my returns more closely, they are lower because of some losses - took more risks with my money. The returns should comfortably be above 25-30% though.

 

For the guys that think this is 1999, can you please share your performance numbers over the past 5 and 10 years?

[stahleyp]

The 5-year return in my wife's IRA accounts is 38% (I invest the money.)

 

My own IRAs have moved between WellsFargo, BofA-ML, Schwab to get a mortgage rate reduction, and on top of that I have Fidelity, Vanguard accounts that have been moved and merged etc. But my returns should not be too different (same portfolio contents and decisions.)

 

Actually, upon checking my returns more closely, they are lower because of some losses - took more risks with my money. The returns should comfortably be above 25-30% though.

 

For the guys that think this is 1999, can you please share your performance numbers over the past 5 and 10 years?

 

If that's an annual return, that is pretty spectacular!