1999 again?

[RuleNumberOne]

@jschembs Thanks for that spreadsheet. The P/FCF multiples are what I expected.

 

Looks like there have been many IPOs over the last 9 months that have not yet made it to the Capital IQ database. The newer the IPO the greater the current P/S multiple. Pager Duty, Crowdstrike, and so on.

 

Zscaler IPO'ed in early 2018 but is also missing from Capital IQ. It trades at 50x 2018 sales.

 

https://www.iposcoop.com/last-100-ipos/

[scorpioncapital]

What difference if you buy value or overpriced growth in a crash ? Didn't Berkshire get cut in half even In 99? Graham said during the great depression everything went down, even cash was worth less than cash . The best time to buy anything is when nothing is particularly inflated ?

[Cardboard]

Just thoughts or prophecy from SaintPeeter on Stockhouse:

 

"War is a great means to purge bad blood. It is inevitable as all of human history has shown. We are afraid of war because we are having such a good life living off of future generations tax. But that could change.

 

Many intelligent historians would say we are just about due for a global conflagration. Certain powers are rising and feel that they can challenge Uncle Sam. Cultural strife and social division are making America look vulnerable.

 

I believe the American Empire will last for quite a while still but that doesn;t mean that other parts of the world won't try to cause havoc.

 

When large scale war occurs, society will revert to survival mode and the essential parts of society need to be preserved. Food, energy, heavy machinery, banking, medical. Facebook and Amazon only do well in a world of abundance and gluttony. Their time of reckoning is near."

 

Cardboard

[Broeb22]

Communication seems like a pretty essential part of human life to me.

 

There is unrest all over the world, and as far as I am aware Facebook has not called out war in Syria or drug wars in much of Central America as a reason for slower growth or lower engagement. Additionally, cable subscriptions did not decline very much at all during 2008. Why would you expect people to give up a free utility like Facebook just because a war is occurring? Would their Ad monetization decline in a war? Almost certainly, every advertising medium probably would see the same impacts.

 

Using history as an example, Sears grew right through the Great Depression and while its growth did slow during WWII, its growth resumed after WWII's conclusion. So, I am less concerned about Amazon enduring business quality, even during something terrible like a war or economic recession. Now, valuation with AMZN is another matter, but you're suggesting these companies' businesses will not perform well, which I disagree with. 

 

https://www.smithsonianmag.com/history/rise-and-fall-sears-180964181/

 

"By 1929, on the eve of the Great Depression, it operated more than 300 department stores.

 

Growth continued even during the economic downturn, because Sears wisely championed an aesthetic of thrift. The chain made its name selling dependable staples such as socks and underwear and sheets and towels, rather than fashion items like those found in traditional department stores such as Marshall Field’s in Chicago or John Wanamaker’s in Philadelphia or New York.  Sears outlets were spare, catering to customers who were interested in finding good value, to meet practical needs. By the end of the Depression decade, the number of stores had almost doubled.  "

 

http://www.searsarchives.com/history/history1925.htm

 

In 1931 Sears retail sales topped mail-order sales for the first time. Stores accounted for 53.4 percent of total sales of more than $180 million. Despite the Depression, Sears continued to open stores during the 1930s. When war broke out in 1941, more than 600 stores were operating. World War II called a halt to Sears retail expansion and even forced several stores to close. After the war, however, Wood resumed his expansion program.

 

 

[Guest ajc]

 

 

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).

 

 

 

Good post, jschembs. I think it's relatively safe to say that the person who posted those tweets didn't put in much comprehensive thought or research.

 

 

 

[UK]

What difference if you buy value or overpriced growth in a crash ? Didn't Berkshire get cut in half even In 99? Graham said during the great depression everything went down, even cash was worth less than cash . The best time to buy anything is when nothing is particularly inflated ?

 

https://money.cnn.com/magazines/fortune/fortune_archive/2002/11/11/331843/index.htm

 

"As for Berkshire's stock--well, it has certainly held its own recently. On March 10, 2000, the Nasdaq peaked (interday) at 5,132. That same day Berkshire hit a multiyear low of $40,800. Recently the Nasdaq traded for 1,270, down 75%, while Berkshire traded for $74,000, up 81%"

 

 

[Guest ajc]

 

Shot: The RealReal held an IPO today opening at 40% above the initial offering price. The online luxury goods reseller currently trades at around 11x revenues.

 

Chaser: The last company RealReal CEO Julie Wainwright took public was Pets.com in the year 2000.

 

 

[RuleNumberOne]

The Russell 1000 is updated just once a year. That is why all the IPOs of the last year are missing. Getting updated next week.

 

I think the cutoff date is May 10, some recent IPOs may not make it into the Russell 1000 this year.

 

https://www.barrons.com/articles/uber-lyft-beyond-meat-stocks-will-join-the-russell-1000-next-week-51561736049?mod=md_home_pan_mkt_news

 

@jschembs Thanks for that spreadsheet. The P/FCF multiples are what I expected.

 

Looks like there have been many IPOs over the last 9 months that have not yet made it to the Capital IQ database. The newer the IPO the greater the current P/S multiple. Pager Duty, Crowdstrike, and so on.

 

Zscaler IPO'ed in early 2018 but is also missing from Capital IQ. It trades at 50x 2018 sales.

 

https://www.iposcoop.com/last-100-ipos/

[Guest cherzeca]

https://www.barrons.com/articles/the-realreal-is-no-pets-com-todays-ipo-market-is-not-the-dot-com-bubble-51561748039?mod=hp_HERO

[rkbabang]

You can't artificially create demand by printing money and giving it to poor people.

 

Not to derail the thread, but I actually think you can.  For instance I have like $200 sitting in my file cabinet, it’s been there for years, and it likely will be there forever.  If the government takes that away and hands it out to 10 alcoholics on the street I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.  I guess we can reasonably call that “demand creation.”  Now if the government finances the handout by printing money instead, things become a bit more complicated but more or less the same thing should happen in the end.  The only difference is that my cash holdings gets diluted by the money printing instead of going down in nominal terms by government confiscation. 

 

Now whether that’s good government policy is another matter … which I guess we can all have fun talking about in the Politics section. 

 

Yes, I agree. You should only be required to pay taxes with money that you plan to never use.

[DooDiligence]

You can't artificially create demand by printing money and giving it to poor people.

 

Not to derail the thread, but I actually think you can.  For instance I have like $200 sitting in my file cabinet, it’s been there for years, and it likely will be there forever.  If the government takes that away and hands it out to 10 alcoholics on the street I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.  I guess we can reasonably call that “demand creation.”  Now if the government finances the handout by printing money instead, things become a bit more complicated but more or less the same thing should happen in the end.  The only difference is that my cash holdings gets diluted by the money printing instead of going down in nominal terms by government confiscation. 

 

Now whether that’s good government policy is another matter … which I guess we can all have fun talking about in the Politics section. 

 

Yes, I agree. You should only be required to pay taxes with money that you plan to never use.

 

https://www.newyorker.com/magazine/2015/11/23/printing-money-books-john-cassidy

 

 

https://www.debate.org/opinions/should-the-us-eliminate-all-taxes-print-the-money-we-need-for-government-spending-and-simply-allow-inflation-to-increase

 

---

 

How do you think crypto will fit in to all of this?

 

I promise to never take uninformed jabs at crypto on here again.

[rkbabang]

You can't artificially create demand by printing money and giving it to poor people.

 

Not to derail the thread, but I actually think you can.  For instance I have like $200 sitting in my file cabinet, it’s been there for years, and it likely will be there forever.  If the government takes that away and hands it out to 10 alcoholics on the street I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.  I guess we can reasonably call that “demand creation.”  Now if the government finances the handout by printing money instead, things become a bit more complicated but more or less the same thing should happen in the end.  The only difference is that my cash holdings gets diluted by the money printing instead of going down in nominal terms by government confiscation. 

 

Now whether that’s good government policy is another matter … which I guess we can all have fun talking about in the Politics section. 

 

Yes, I agree. You should only be required to pay taxes with money that you plan to never use.

 

https://www.newyorker.com/magazine/2015/11/23/printing-money-books-john-cassidy

 

 

https://www.debate.org/opinions/should-the-us-eliminate-all-taxes-print-the-money-we-need-for-government-spending-and-simply-allow-inflation-to-increase

 

---

 

How do you think crypto will fit in to all of this?

 

I promise to never take uninformed jabs at crypto on here again.

 

Ah, you are starting to see.  To be honest, I'm not sure why governments tax at all when they have complete control of the money supply.  Maybe it is just to keep their funny money from being abandoned by the population (dollars are necessary, because taxes must be paid in dollars).  Still they could keep taxes low and print the rest. To the average guy on the street taxes are real and painful, but inflation is just a force of nature that they don't understand.  No one can print more Bitcoin however.

[Guest ajc]

 

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.

 

 

 

[LC]

Yes, never be so sure about humans, especially those who are drunk all the time.  ;)

They may be the only humans you can be sure about :D

[RuleNumberOne]

Bundesbank is the only honest central bank, every other central bank is crooked.

One thing that has juiced US stocks is the negative rates in Europe. If the ECB is forced to raise rates to pop their housing bubble, there will be an earthquake. Searching for "European house prices" at ft.com:

 

"Soaring German housing costs leave Merkel vulnerable" - October 25 2018

https://www.ft.com/content/8f96a698-d82d-11e8-a854-33d6f82e62f8

 

 

"Eurozone housing prices rise at fastest pace since crisis" - July 10 2018

https://www.ft.com/content/d5a3dae4-843f-11e8-a29d-73e3d454535d

 

Home prices over the last year.

    Ireland    - up 12.3%

    Portugal  - up 12.2%

    Latvia    - up 13.7%

    Slovenia  - up 13.4%

    Slovakia  - up 11.7%

    Netherlands - up 9.3%

 

"Germans warn on high property prices" - March 12 2018

https://www.ft.com/content/3cf612aa-1642-11e8-9c33-02f893d608c2

 

Nationwide rents rose 7.2% over the last year

 

 

[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