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Multiple expansion contest


RuleNumberOne
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We could collectively prepare a list of stocks with fascinating multiple expansions.

 

My initial contribution is ServiceNow - the latest company to enter the prestigious S&P 500.

 

To remove the effects of the Q4 2018 correction, I am comparing Q3 2018 to Q3 2019.

 

- After reporting 39% revenue growth in Q3 2018, NOW fell to $166.

- After reporting 33% revenue growth in Q3 2019, NOW rose to $281.

 

That is a rise of 69% in the stock price. The revenue deceleration resulted in P/S expansion of 27% (1.69/1.33 = 1.27). The P/S went from around 13 to 17 even with slowing revenue growth!

 

I think this multiple expansion contest could be an entertaining one.

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AAPL is my second entry for the multiple expansion contest.

 

October 30 2018: AAPL reports 20% revenue growth. Market cap $1.003 T. Stock price $207

 

This year's quarter: AAPL reports 2% revenue growth in the latest quarter. Market cap $1.202 T. Stock price $266

 

Fully diluted market cap expanded by 20%. Stock price expanded by 28.5%. I didn't calculate EV, but EV would have gone up somewhere between the market cap expansion and stock price expansion (buybacks reduce net cash on balance sheet)

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MSFT is the third entry for the multiple expansion contest.

 

After reporting 18.6% revenue growth in October 2018, MSFT was at $107.

After reporting 13.7% revenue growth in October 2019, MSFT is at $152.

 

One-year performance: stock price went up 42%, GAAP EPS went up 21%, revenue went up 13.7%.

 

Where is Jim Bullard when you need him?

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Mastercard is the fourth entry for the multiple expansion contest.

 

After reporting Q3 GAAP EPS $1.82 last year, MA was at $197. 15% revenue growth

After reporting Q3 GAAP EPS $2.07 this year, MA is at $291. 14% revenue growth

 

48% increase in stock price with just 14% increase in both EPS and revenue.

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A lot of multiple expansion has been with high quality stocks. MA, V, FISV, MSFT various SAAS/cloud plays like WDAY, NOW, rollups like SHW, ROP, POOL, CSU-TO etc.

 

Oddly enough, some fangs like GOOG and FB aren’t all that expensive compared to above. They haven’t really seen multiple expansion lately either, as their share price has roughly followed their growth rate.

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40% of Stanley Druckenmiller's 13-F is in these four stocks: MSFT, AMZN, NOW, WDAY

 

"The fear of missing out unleashed on investors already raw with tech envy during those fateful 16 months was more than many could bear. Perhaps most famous among them is billionaire investor Stanley Druckenmiller, who scooped up internet stocks in 1999 after betting against them earlier that year. Drunk with success, he plowed an additional $6 billion into tech stocks just before they collapsed in early 2000, handing him a $3 billion loss. Druckenmiller later recalled, “I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself.” He may as well have been speaking for an entire generation of investors."

 

https://www.bloomberg.com/opinion/articles/2019-11-26/2019-markets-and-economy-feel-like-1998-tech-bull-market

 

 

A lot of multiple expansion has been with high quality stocks. MA, V, FISV, MSFT various SAAS/cloud plays like WDAY, NOW, rollups like SHW, ROP, POOL, CSU-TO etc.

 

Oddly enough, some fangs like GOOG and FB aren’t all that expensive compared to above. They haven’t really seen multiple expansion lately either, as their share price has roughly followed their growth rate.

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  • 2 weeks later...

I didn't look at Splunk's acquisitions because it takes too much time. Here is one, SignalFX bought by Splunk for $1 billion a few months ago:

https://en.wikipedia.org/wiki/SignalFx

 

VCs put in $103 million and sold it for $1 billion. My point is that they can repeat this same process again and again if needed. This is tech that many teams in Silicon Valley can build.

 

So in this case, would Splunk be justified in writing off $1 billion in intangibles and reporting a non-GAAP EPS? Or should the $1 billion be counted as an R&D expense that was required to stay in business?

 

It is not just Splunk, other never-profitable "cloud" companies are doing the same thing with acquisitions. Nobody bothers with looking deeper.

 

The ESTC thread made me take a look at SPLK's valuation.

 

Over the last year, SPLK's growth rate has gone from 40% to 30% while its stock has climbed higher and higher. IPO'ed in April 2012, there is no P/E, just a $23 billion market cap.

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i was reading about the 1970-1971 stock market. The Nifty Fifty had genuine earnings and dividends. This crop of cloud stocks has no earnings and some of them may never have any earnings. These market caps for tech stocks would have been considered impossible just a few years ago. You can get to $10 billion - $50 billion cloud market caps very easily nowadays without any earnings.

 

The Nifty Fifty were wide-moat blue-chips paying dividends. Their P/Es became very high, but at least they had P/Es.

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  • 4 weeks later...

In 19 trading days, AAPL has added another 10%. Up 35% over the last 3 months, 20% over the last 2 months, 10% over the last one month.

 

AAPL has climbed 20% since its Q4 earnings report. That report showed a decline of 9.3% in operating income for the full-year 2019 compared to 2018.

 

Over 2019, revenue fell, gross margin fell, operating income fell even more.

 

https://www.apple.com/newsroom/pdfs/Q4%20FY19%20Consolidated%20Financial%20Statements.pdf

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AAPL has added another 3% in 2 days. It is well on its way to rise another 10% in January.

 

https://www.barrons.com/articles/where-to-find-shelter-in-the-coming-bear-market-51577790001

 

"He describes the current environment as a “kids market,” relying on a phrase introduced in the 1960s by Adam Smith, the pen name of George Goodman, in his classic book The Money Game. Goodman used the phrase to refer to an investment environment in which the traders making the most money are those too young to remember the last bear market.

 

Gartman describes today’s “kids” as “young, brash, utterly naive, ill-educated, egregiously overconfident, neophyte-yet-fearless ‘investors.’” Market veterans such as himself are left to do little more than stand on the sidelines, “fearful yet envious” of the kids’ profits.

 

This isn’t the first kids market that Gartman has encountered in his career, of course. All have ended badly, and he’s confident the current one will too. When it does, the “all-too-easily-made profits [of today’s] kids” will evaporate.” Out of the ashes will emerge the latest crop of poorer, but older and wiser, investors."

 

In 19 trading days, AAPL has added another 10%. Up 35% over the last 3 months, 20% over the last 2 months, 10% over the last one month.

 

AAPL has climbed 20% since its Q4 earnings report. That report showed a decline of 9.3% in operating income for the full-year 2019 compared to 2018.

 

Over 2019, revenue fell, gross margin fell, operating income fell even more.

 

https://www.apple.com/newsroom/pdfs/Q4%20FY19%20Consolidated%20Financial%20Statements.pdf

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AAPL has added another 3% in 2 days. It is well on its way to rise another 10% in January.

 

https://www.barrons.com/articles/where-to-find-shelter-in-the-coming-bear-market-51577790001

 

"He describes the current environment as a “kids market,” relying on a phrase introduced in the 1960s by Adam Smith, the pen name of George Goodman, in his classic book The Money Game. Goodman used the phrase to refer to an investment environment in which the traders making the most money are those too young to remember the last bear market.

 

Gartman describes today’s “kids” as “young, brash, utterly naive, ill-educated, egregiously overconfident, neophyte-yet-fearless ‘investors.’” Market veterans such as himself are left to do little more than stand on the sidelines, “fearful yet envious” of the kids’ profits.

 

This isn’t the first kids market that Gartman has encountered in his career, of course. All have ended badly, and he’s confident the current one will too. When it does, the “all-too-easily-made profits [of today’s] kids” will evaporate.” Out of the ashes will emerge the latest crop of poorer, but older and wiser, investors."

 

In 19 trading days, AAPL has added another 10%. Up 35% over the last 3 months, 20% over the last 2 months, 10% over the last one month.

 

AAPL has climbed 20% since its Q4 earnings report. That report showed a decline of 9.3% in operating income for the full-year 2019 compared to 2018.

 

Over 2019, revenue fell, gross margin fell, operating income fell even more.

 

https://www.apple.com/newsroom/pdfs/Q4%20FY19%20Consolidated%20Financial%20Statements.pdf

 

I have seen few folks as consistently wrong and outlandishly stupid as Dennis Gartman over the years. He may deride those making money as "“young, brash, utterly naive, ill-educated, egregiously overconfident, neophyte-yet-fearless ‘investors.’” .... but Dennis is unequivocally "“old, brash, utterly naive, ill-educated, egregiously overconfident, and fearful’”

 

Its like the guys who have been wrong just feel the need to get louder rather than look for ways to invest. While things have definitely changed IMO over the past few months, it wasn't long ago you could find TONS of quality companies trading at very reasonable valuations. That number has recently declined substantially, but that still doesnt mean there arent opportunities.

 

I mean, even a 100% layup for these dopes would be Berkshire. I dont find it the most compelling investment at the moment, but for shits sake, it is undoubtedly a 100% better option than just sitting on cash. And I dont think anyone can make the case its "expensive". So what are people like Gartman whining about?

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I have no idea of Gartman's track record (can't bother looking it up). Just wanted to post the Money Game excerpt because I agree with it. I have never paid attention to Dennis Gartman but I just happened to read this over the weekend and thought the Money Game was very appropriate.

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Never heard of Gartman, but I LOVE the Money Game - it's well-written, it's very funny (not easy when writing about finance), and the kids market thing doesn't seem unreasonable, though I wouldn't be surprised if it kept running for a while as these things usually do for longer than you think possible.

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Gartman has had some absolutely epic moments and flip flops/embarassingly poor on timing calls, particularly during the oil crash in 2015-16. He is in many circles thought to be a contrarian indicator. One week he was making profound statements about we're definitely headed lower, only to mark the bottom, and then a few days later, profoundly declaring the bottom was in, only to see the bottom fall out...round and round for a good while. He's also one of those, "I'd be long emerging market equities but only hedged via mid duration sovereign debt, in yen denominated terms" kinda guys. A real goof.

 

But yea, IDK know and totally agree with you guys, this stuff is getting kinda batshit crazy. Apple gapping up the way it has and continues to do. MasterCard, Now even GE +7% for no reason. I was long in the camp of "youre a dope if you think we're in a bubble", but the last few months have been displaying all of the signs and textbook markings of one. Whether in 2-3 years I sound bitter about getting it wrong like Gartman, as the party rocks on, IDK. But I think the moves in a lot of stuff is unhealthy.

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Guest cherzeca

find your paradigm and live within it.  most smart professional investors (eg marks) are uncomfortable with close to 20x PEs and negative interest rates, and with good reason.  these smart investors were proven right in 2000 after the nasdaq run-up....except nasdaq was 5000 then and >9000 now, so right then and rightish now.

 

the worst thing you can do is to find a new paradigm whenever the wind shifts

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Yeah, the market seems very much like 1999 now.  I think there is a generation of investors at work that is either on autopilot using ETF’s and index funds or driven by narratives rather than fundamental valuations. Great business/CEO, great product, high customer retention, but outlandish valuations and operating losses shock no one. I also note that more and more fund managers and CEO note how important it is to “tell a story”. While good communication always has value, I would like the numbers do most of the talking.

 

I do agree it could go on for a while, but generally speaking it’s time to worry when nobody else does.

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I agree that it could go on for a while. Unlike Q4 2018 when the Fed said it is far from neutral, right now the Fed has said no hikes in 2020. A risk factor though is the lack of revenue and earnings growth in stocks like AAPL.

 

If central bankers are waiting for Europe to get back on its feet before tightening, tightening can never happen. Germany and Italy have been stuck in a recessionary state for two years already. There is something completely broken in Europe, two years is a long time.

 

https://www.bloomberg.com/news/articles/2020-01-02/euro-zone-factories-end-2019-in-a-funk-as-output-and-orders-fade

 

"Euro-zone orders fell in December, with the rate of job losses the sharpest since the start of 2013, the data showed. Germany was again the weakest-performing country, and the contractions in the Netherlands and Italy were the steepest in more than six and a half years. France saw a slight increase in activity."

 

 

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Found it finally. The Money Game stuff.

 

https://boards.fool.com/the-great-winfield-11848129.aspx?sort=username

 

"The Great Winfield found that he couldn't make money in a speculative market bubble because his memory kept getting in the way. As he said to Adam Smith:

 

"You know and I know that one day the orchestra will stop playing and the wind will rattle through the broken windowpanes, and the anticipation of this freezes us. We are too old for this market. The best players in this kind of market have not passed their twenty-ninth birthday."

 

So, he hired the "kids" to manage the money. "The strength of my kids is that they are too young to remember anything bad, and they are making so much money they feel invincible."

 

So, Adam Smith wants to ask a few questions of a "kid" about some of the swinging stocks he owns, but the Great Winfield interrupts:

 

"Look at the skepticism on the face of this dirty old man. . . . You can't make any money with questions like that. They show you're middle aged, they show your generation. Show me a portfolio, I'll tell you the generation. The really old generation, the gray beards, they're the ones with General Motors, AT&T, Texaco, International Paper, and Dupont, all the stocks nobody has heard of for years. The middle-aged generation has IBM, Polaroid, and Xerox, and can listen to rock and roll music without getting angry. But life belongs to the swingers today. . . . You can tell the swinger stocks because they frighten all the other generations. Tell him, Johnny. Johnny the Kid is into the science stuff."

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