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An unprecedented bubble has formed in the US stock market


Estimates have completely broken away from fundamental analysis, multiples are at historic highs, the rate of issue of securities is off the charts - and all this is accompanied by insanely speculative behavior of investors. A big crisis is inevitable. I want to start my story with the seemingly obvious, but today not everyone understands why the actions appeared. So, a share is a share in a company. Why do you need a share in a company? In order to have some of her profits. That is why the real value of a share is determined by the current and future profit of the issuing company, which is transferred to the shareholder in the form of dividends. Some companies pay dividends on a quarterly basis, others annually, and there are those that have not shared their net profit with their shareholders for more than a decade. At the end of the last century, this was a rarity, but with the advent of the Internet, the speed of business scaling increased by an order of magnitude, and technology companies made it a rule to reinvest all net profit in development so that in the future dividends would be even greater. Again, the value of any stock is provided only by its real or potential dividend yield. However, the value is not equal to the value and the actual price of a share is always speculative.
This is explained by the fact that all people have different expectations from the future profit of the company, and besides, each person is irrational by nature. Would you buy a stake in a company that will pay off 30 years without the opportunity to sell it? I’m sure not. But if this share has been oversold hundreds of times over the past month and its price has grown significantly, there is a desire to speculate on its value. That is, initially someone acted irrationally and started the flywheel. The crowd is exposed to the lemming effect, and in such a situation the market ceases to be interested in real value. This creates an economic bubble. The introductory part is over, and I'm moving from an abstract example to a real one. In financial analysis, there is a P / E ratio - the ratio of capitalization to net profit. Tesla is now worth 1,500 annual profits. In other words, while maintaining the current level of income, the investment in Tesla will pay off in one and a half millennia. However, the market for electric vehicles is constantly expanding, and with it, the company's revenue is growing steadily. Consequently, the profitability will grow, and the payback period will decrease. Therefore, I invite you to speculate about how many years it will take to return an investment in a $ TSLA share through dividends that have never been paid yet. Over the past 3 years, Tesla's average sales growth has been 42%. The larger the company, the more difficult it is to maintain growth rates, but many believe that the revolution in the automotive market is just beginning. Therefore, let's assume that Tesla sales will only grow in the future, and by 50% annually. Thus, in 2030 Tesla's revenue will exceed $ 1.5 trillion - this is 3 times more than Walmart, the largest company in terms of revenue to date.
The stock market is engulfed in speculative frenzy. Trillion-dollar capitalizations are probably the most dramatic thing that has ever happened in the entire history of finance. Charles Munger Vice Chairman of the Board of Directors of Berkshire Hathaway
Tesla may start paying dividends in 2030, but to what extent? All companies have different dividend policies. VTB directs only 5% of its earnings to dividend payments and therefore is estimated at 3 annual profit. And, for example, P&G has a payout ratio above 55% and a P / E ratio already reaching 25. In our hyper-optimistic forecast, Tesla's board of directors is as generous as possible and will steadily allocate 80% of net income to dividends, as Coca-Cola does. To assess the payback, it remains to figure out the profitability of Tesla. In 2020, the company reported its first annual net profit. This result was made possible solely thanks to regulatory loans. Operating strictly, the company is still unprofitable, and I wrote more about this in Grox. But for now, we will drop these formalities and take into account that Tesla is investing huge amounts of money in expanding production. If we look at margins among the largest automakers such as Toyota, Volkswagen, Ford and General Motors, we will see that their profit margin is historically less than 10%. However, Musk's genius is endless, so let's imagine Tesla's margins hit 20% in 2031. With a net profit of more than $ 400 billion, the company will spend more than $ 300 yards in dividends. Having determined the dividend income, we can state that a share worth $ 850 under the above circumstances will pay off in 2 years from the date the dividend payment starts. The total payback period will be 12 years. All that is needed is for Tesla's revenue to increase 100 times, to $ 3 trillion, for the company to become the richest in the world and multiple times surpass the entire industry in efficiency while competitors are idle. Surprisingly, not everyone understands that such a scenario is impossible or, to put it mildly, statistically unlikely. I meet the opinions of dollar millionaires, representatives of the venture capital, who justify Tesla's value by comparing its revenue growth as a percentage of other automakers, as if they do not understand that + 5% to 100 billion is more than + 20% to 20. The next graph is very well visualizes the degree of absurdity of such thinking. image Comparison of capitalization and revenue of automakers The market value of Tesla is significantly higher than the capitalization of 9 well-known automakers, despite the fact that their total revenue is more than 50 times more than that of Musk's enterprise. At the same time, each of the 9 “old-fashioned” companies produces electric vehicles, and, for example, sales of those in units of products from Renault and Nissan account for half of Tesla's sales. Let me remind you that in 2020 Tesla delivered almost 500 thousand vehicles, thus showing a 36% increase in sales. And Volkswagen sold 5.3 million vehicles during the same period, including 212,000 electric vehicles, which is 158% more than last year. By the way, Tesla sales in Europe decreased by 10%, while in Germany theyfell by 36%, although the local market has doubled. image Capital Expenditure and EBITDA Marginality A buyer of Tesla shares acquires a stake in the company at a multiple of $ 1.5 million per vehicle sold. General Motors shares are trading at a multiple of $ 9,000 per vehicle sold in 2020. Fans of the Musk brand believe in the exceptional financial superiority of his company, but Tesla's EBITD margin is lower than that of Volkswagen or General Motors. Do you think only Musk is investing in the future? However, each of the mentioned corporations has more CAPEX than Tesla. The $ TSLA alone is a huge bubble of hundreds of billions of dollars, and there are many similar companies on the market. Now that everyone understands what “overvalued” means, I propose to move from the particular to the general. According to TradingView, more than 150 companies with a valuation above $ 1 billion are traded on US exchanges today, with capitalization ranging from hundreds to several thousand annual profits. The total market value of the first ten companies from this list exceeds $ 1.5 trillion! However, it is unwise to draw any conclusions from a single P / E ratio. Maybe it so happened that it was recently that most companies have increased capital expenditures and, as a result, their net profit has dropped impressively. So let's look at the CAPE (Cyclically Adjusted Price / Earning Ratio) or Schiller's P / E of the S&P 500, where instead of "earnings" is the average profit over the last 10 years, adjusted for inflation. image S&P 500 Schiller P / E Today's CAPE is higher than before Black Tuesday, which preceded the start of the US Great Depression. However, we can clearly see that the CAPE was significantly higher in the early 2000s, when the dot-com bubble inflated. It may seem to some that it is still not so bad, but in order to draw conclusions, you need to think systematically and consider a whole range of metrics. So I suggest you take a look at the P / S ratio - the price-to-sales ratio. image S&P 500 P / S Ratio The P / S is at an all-time high. Even during the dot-com boom, estimates for this indicator were more modest, and note what they were in the very early nineties. Of course, tech companies have higher margins than offline businesses, and P / S should have grown with the advent of the internet. But today Snowflake is valued at nearly 150 in revenue, Zoom at 60, Tesla at 30. Now look at the S&P 500 dividend yield. image S&P 500 Dividend Yield A few dozen basis points are missing from all-time lows. I want to emphasize that the last three graphs reflect the state of affairs only in the largest US companies from the eminent Standard & Poor's index, where each component is approved according to certain criteria. For comparison, the NASDAQ 100 CAPE is 55.33 , Russel 2000 is112.98 . With all this, there are still many companies with negative returns, for which P / E is not considered in principle. I don't have fresh numbers, but in 2018 83% of companies that went public were unprofitable - two percentage points more than in 2000. And today, shares of unprofitable tech companies are showing exponential growth never seen before. image The Index of Unprofitable US Tech Companies For example, shares of the Chinese electric car manufacturer NIO, which are traded on the NYSE, have surged 25 times since last spring. Over the past year, the company sold only 43 thousand cars, and its capitalization is $ 70 billion! NIO's net loss on TTM (Trailing Twelve Months) is $ 999 million with sales of $ 1.8 billion. That is, a deeply unprofitable company is estimated at 40 annual revenues! A similar situation is also observed in relation to XPeng, another Chinese electric vehicle manufacturer. The expenses of this company are almost twice the income and in proportion it is overvalued even more than NIO. With revenues of $ 520 million and a net loss of $ 420 million, its capitalization is above $ 23 billion. Such an offline business has a P / S of 44. image Firms that are losing money: their capitalization and losses I would like to separately mention the IPO of AirBnB. Before the pandemic, the venture valuation of the service reached $ 31 billion, and then dropped to $ 18 billion. However, at the opening of trading, the exchange value of AirBnB exceeded $ 100 yards. Just think about it: in just a few months, a company whose business model is built on people traveling, in the era of pandemic and quarantines, has grown in value more than 5 times. It is also noteworthy that the market for some reason valued AirBnB much more expensive than Booking Holdings and Marriott, whose capitalization is 85 and 40 billion dollars, respectively. In November, when the IPO prospectus appeared on the US Securities Commission's website, I published a comparison table of these three companies. image Marriott's revenue in 2019 was more than 4 times that of AirBnB, Booking Holdings's revenue was 3 times. Booking even had a net profit greater than AirBnB's revenue, and sales have grown faster in absolute numbers in recent years. The pandemic has had the least impact on AirBnB's revenue structure, but it’s the company that wears the crisis the worst. Note, too, that being tough and clumsy, unlike newfangled startups, Marriott has been the best cost-optimizer and has proven to be as flexible as possible during the crisis. An equally striking case of irrational behavior of the stock market is the entry to the DoorDash exchange. It was then that I first spoke about the new dot-com bubble in front of a wide audience. Therefore, I will quote myself:
DoorDash, one of the world's largest food delivery services, held an IPO for an estimate of $ 41 billion. The company's revenue for 9 months was $ 1.9 billion, a net loss of $ 534 million. On the first day of trading, the shares rose 80%, and the capitalization now exceeds $ 70 yards. which is 35 TTM proceeds! And this does not surprise anyone! Among the authoritative people in the Russian Internet, I see the opinion that $ DASH will cost 10 times more, because the food market is very large and stable. This, of course, is a strong analytics - a subjective assessment of the potential of the idea itself, and not of the operating system. And this is how really successful entrepreneurs, dollar millionaires argue, and some of them are representatives of the venture capital environment. Let me remind you that this summer, Just Eat Takeaway bought the historically lucrative GrubHub for $ 7.3 yards. The cost-to-revenue ratio was 7 times less! Yes, DoorDash is growing faster, but it has never shown profit, and the multipliers for one and the same business have grown many times over several months! Incidentally, Uber acquired Postmates in July for just $ 2.65 billion! In general, I guarantee you that time will pass and you will associate the phrase “dot-com bubble” not only with the beginning of the 2000s. 10.12.2020
It is really hard to find a profitable one among the companies that are going to IPO. Affirm , Snowflake , Asana , Palantir , Unity, and others I mentioned at Grox have a history of loss. And it’s okay that after many years they have not learned how to make money. More worrisome is that their rating ratios exceed those of Google when it went public in 2004. Get it right, I'm not saying that nothing should be rated more expensive than Google, because nothing is more promising than a search engine. Not. Thinking like that has nothing to do with analytics. I mean, Brin and Page's venture has been profitable since 2001, and its revenues have grown hundreds of percent. If you look at the S1 form , you realize that Google was a money machine that was priced at 25 in earnings. Compare this to modern startups where the P / S is the same or higher. Abnormal revaluation by multiples is only the most modest thing that is happening on the market today. In 2020, 248 SPAC IPOs took place, as a result of which more than $ 83 billion were raised.In comparison with 2019, the number of such IPOs increased by 500%, and the amount of attracted capital increased 6 times. image Capital Raised for IPOs The above numbers certainly indicate an unhealthy interest in SPAC, and the trend is just starting to pick up steam. If you believe the SPACInsider service, and Zacks specialists refer to it in a publication on the Nasdaq website, then in 2021 there were already 100 SPAC IPOs, through which they raised $ 29 billion! For those who do not know, SPAC (Special Purpose Acquisition Company) is a non-commercial company that is formed solely to raise capital through an initial public offering. The popularity of this method of entering the stock exchange is understandable - if there is a rabid crowd of retail investors on the market that buys up everything, then you don’t want to share money with investment bankers and underwriters. But the quality and quantity of issuers raises questions. The most striking example of a SPAC IPO is the infamous Nikola, whose capitalization was close to $ 30 yards despite the fact that the company has nothing - neither revenue, nor its own production, nor even a product. The market simply believed in the prototype electric truck, which also turned out to be a fake. To give you an idea of the scale of the madness, I will mention the electric vehicle manufacturers that entered the stock exchange through SPAC in the last six months: Nikola, Lordstown, Fisker, Hyliion. The last three debuted on the stock market in October. Everything, without really having sales, is estimated at billions. It is also worth mentioning QuantumScape and Romeo Systems, which produce batteries for electric vehicles. And in the near future, expect SPAC placements for Arrival, Lion, Canoo and possibly Karma. In general, the excitement for electric cars is reminiscent of the ICO fever of 2018, after which nothing worthwhile has never degenerated. The Fed floods the market with money and creates excess liquidity. This is what first of all contributes to the growth in the value of assets, despite the decrease in their profitability. Investors rely on favorable monetary policy and zero real rates, extrapolated indefinitely. But ideal economic and financial conditions cannot last forever.
I think we are borrowing from the future. The Fed is pushing people to take more risks and pushing up stock prices. It will end badly. Leon Kuperman founder of Omega Advisers hedge fund
Look at the credit quality of public non-financial companies using Standard & Poor's methodology. In 1980, there were 65 issuers with AAA ratings, and now there are only 5. Previously, more than half of the total number of companies were in the A category, today most of the companies are assigned a junk rating (BB and below). image Credit quality of public non-financial companies However, the risks of bankruptcy do not in the least confuse investors. Over the past 10 months, the S&P 500 is up 70%. This is more than double the normal rate of a bull market rally. And Russell 2000 grew by 100% over the same period, although the debt burden of companies from this index exceeded their pre-tax revenues, as evidenced by data from Societe Generale. image Russell 2000 Debt Burden In a Financial Times article titled "Fed backstop masks rising risks in America's corporate debt market," I came across another interesting figure: one in seven companies with a capitalization of $ 300 million to $ 2 billion has interest payments on loans and bonds that exceed profits over the past 3 years. Again, this is only comparable to the early 2000s. image The number of zombie companies from the Fed creates a bad trend, which is matched by large capital, and retail investors increase the asymmetry and turn the stock market into a casino. The latter are not interested in fundamental analysis in principle, and by 2020 there are so many of them that they are already setting their own vector of price movements. I think you've already heard about the coordinated actions of the r / wallstreetbets audience against hedge funds and you know what happened to the stocks of $ GME, $ AMC, $ BB and others. Even Nokia's quotes, which were not the focus of the Reddit community, jumped by tens of percent. Subscribers to r / wallstreetbets in a couple of hours were able to raise its capitalization from 20 to 50 billion dollars. This is an unprecedented story and will be covered in financial textbooks.
By the way, according to the experience of Jeremy Grantham from GMO, even such indirect factors as the growing hostility towards bears on the part of bulls indicate the existence of a bubble. In 1929, shorting carried the risk of physical harm and even murder.
Today we live in a world where one tweet by Elon Musk expressing sympathy or praise for a particular product can raise the manufacturer's stock value by 10 percent or more. At least this was the case with Etsy and the Cyberpunk developers. And after he put the hashtag #bitcoin on his Twitter account, the value of BTC increased by 15% in half an hour. The behavior of users of Robinhood and similar apps defies any logic. For example, at one point they began to buy shares of Hertz, which was in bankruptcy proceedings, and the securities rose in price 10 times. Kodak has risen 30 times in price on news that the company will produce chemical elements for the treatment of COVID-19. How many times have investors just confused tickers? Just the other day after Elon Musk's broadcast in the Clubhouse, home traders raised the shares of the TikTok houses of Clubhouse Media Group by 100%. That is, many of them did not even know that the now popular social network with voice chats is a private company. The same was with the Signal. image The volume of margin debt The level of margin lending has reached an all-time high, and the activity of retail investors in the options market has increased eightfold over the past year. Now they are literally moving entire indices, as detailed in the article "How the Little Guy Is Fueling the Stock Market's Wild Ride" on Barron's . All this is facilitated by the policy of quantitative easing. According to research by Yodlee, Americans, who make between $ 35,000 and $ 75,000 a year, traded 90% more stocks than the week before they received their incentive check. And they noticeably help inflate prices.
Apotheosis
Since the summer of last year, the market has been developing at an accelerating pace and with growing speculative excesses. Almost all indicators are at extreme points, including the Buffett indicator , which shows the ratio of market capitalization to GDP. All of this is indicative of a huge financial bubble.
The long-to-long bull market since 2009 has finally matured into a full-blown epic bubble. I believe this event will be recorded as one of the greatest bubbles in financial history, along with the South Sea bubbles of 1929 and 2000. Jeremy Grantham Founder of GMO Investment Company
Bubbles have arisen before, but they arose under accommodative monetary conditions in a state of economic superiority. After the global crisis caused by the pandemic, the United States, like the rest of the world, is in a completely different economic situation. Today's bubble differs from all previous ones in that it was formed with a strong drop in GDP, an unprecedented rise in unemployment, a sharp decline in exports and a host of social problems. A puncture in overvalued sectors and asset types can begin at any time. When this happens, the consequences will be painful as never before. For example, John Hassman of the Hussman Investment Trust expects the S&P 500 to drop to 70%. We are in for a big financial crisis, which the market did not want to acknowledge last spring. And while we are all waiting for him, I want to remind you that “the market can remain irrational longer than you can remain solvent”.
MeLavi 13 february 2021, 14:36
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