Tuesday, June 26, 2018 8:37:55 PM
Bubble stocks...I know of a few others...
...from David Stockman
Are you still looking for proof that honest price discovery is dead?
Let’s take a look at the absurd run of the FANGMAN stocks at the center of the current bubble.
Every one of these seven stocks is wildly overvalued. And they epitomize an utterly false Wall Street narrative.
That is the risible assurance that the booming tech sector reflects extraordinary but sustainable “growth.”
In fact, the “growth” in question isn’t sustainable.
Nor is it particularly impressive.
It sure as heck doesn’t come close to justifying a $4.2 trillion collective market cap.
Here are the poster boys for the Federal Reserve’s third great bubble of the last 20 years:
Facebook (NYSE: FB)
Amazon.com (Nasdaq: AMZN)
Netflix (Nasdaq: NFLX)
Google/Alphabet (Nasdaq: GOOGL)
Microsoft (Nasdaq: MSFT)
Apple (Nasdaq: AAPL)
Nvidia (Nasdaq: NVDA)
FANGMAN’s market capitalization has doubled since February 2016. It’s quadrupled since June 2013.
A 100% gain in market cap over the last 28 months? It’s accompanied by a 13% gain in operating free cash flow.
That 30% average annual market cap growth since June 2013? Free cash flow’s been growing at barely 10% a year.
Those aren’t sustainable equations.
It’s more like evidence of rampant momentum chasing – especially when it comes to these behemoths.
The FANGMAN companies are already huge.
Their respective technologies, products, and services are mature. They’re embedded in the culture.
There simply isn’t enough “blue sky” to justify any “prepaid market cap.” The hypothesis that they’ll grow into today’s elephantine valuations is not supported by any data.
Their current free cash flow multiples are already absurd.
They’re currently trading at more than 30 times free cash flow.
Sooner or later, equity values depend upon free cash flow. But these companies can’t possibly grow at anything close to the rates implicit in their current cash flow multiples.
For instance, combined sales of $720 billion have increased by 13.7% a year since June 2013. Even that’s not sustainable on the pure math of it.
Ten more years of that growth rate would result in $2.6 trillion of sales, 20 more years nearly $10 trillion.
Neither trees nor Apple can grow to the sky.
Their free cash flow margin is a healthy 18.7%. But, as happens to maturing companies, that margin has “normalized” from 22.1% five years ago.
FANGMAN’s sales growth rate will soon bend toward the trend of nominal GDP growth. That’s about 4% per year. Margins have already topped out.
There’s simply no prospect of “growing” into 30 times free cash flow multiples.
At the end of the day, the cash flow statement doesn’t lie.
Companies can flatter their top and bottom lines for a while with huge investments.
Items like “working capital” and “capital expenditures” don’t hit the profit and loss statement immediately.
But, eventually, you have to have a commensurate pick-up in free cash flow. Or you have profitless growth… and a consequent huge downshift in valuation.
FANGMAN’s soaring market cap is a sign of the destruction of honest price discovery.
It’s not evidence of a technology renaissance driving a healthy, growing market.
All told, Tech Bubble 2.0 has blown at least $2 trillion of bottled air into FANGMAN alone.
There is still no reason why the free cash flow multiple from June 2013 should have more than doubled.
If that more realistic 14 times free cash multiple prevailed, the FANGMAN stocks would be worth $1.9 trillion, not $4.2 trillion.
That’s about 55% of downside from here.
Folks, look out below…
The bubble logic driving tulipomania has since acquired a name: “the greater fool theory.” Although by any conventional measure it is folly to pay thousands for a tulip bulb (or for that matter an Internet stock), as long as there is an even greater fool out there willing to pay even more, doing so is the most logical thing in the world.
– Michael Pollan, The Botany of Desire: A Plant’s-Eye View of the World (2001)
...from David Stockman
Are you still looking for proof that honest price discovery is dead?
Let’s take a look at the absurd run of the FANGMAN stocks at the center of the current bubble.
Every one of these seven stocks is wildly overvalued. And they epitomize an utterly false Wall Street narrative.
That is the risible assurance that the booming tech sector reflects extraordinary but sustainable “growth.”
In fact, the “growth” in question isn’t sustainable.
Nor is it particularly impressive.
It sure as heck doesn’t come close to justifying a $4.2 trillion collective market cap.
Here are the poster boys for the Federal Reserve’s third great bubble of the last 20 years:
Facebook (NYSE: FB)
Amazon.com (Nasdaq: AMZN)
Netflix (Nasdaq: NFLX)
Google/Alphabet (Nasdaq: GOOGL)
Microsoft (Nasdaq: MSFT)
Apple (Nasdaq: AAPL)
Nvidia (Nasdaq: NVDA)
FANGMAN’s market capitalization has doubled since February 2016. It’s quadrupled since June 2013.
A 100% gain in market cap over the last 28 months? It’s accompanied by a 13% gain in operating free cash flow.
That 30% average annual market cap growth since June 2013? Free cash flow’s been growing at barely 10% a year.
Those aren’t sustainable equations.
It’s more like evidence of rampant momentum chasing – especially when it comes to these behemoths.
The FANGMAN companies are already huge.
Their respective technologies, products, and services are mature. They’re embedded in the culture.
There simply isn’t enough “blue sky” to justify any “prepaid market cap.” The hypothesis that they’ll grow into today’s elephantine valuations is not supported by any data.
Their current free cash flow multiples are already absurd.
They’re currently trading at more than 30 times free cash flow.
Sooner or later, equity values depend upon free cash flow. But these companies can’t possibly grow at anything close to the rates implicit in their current cash flow multiples.
For instance, combined sales of $720 billion have increased by 13.7% a year since June 2013. Even that’s not sustainable on the pure math of it.
Ten more years of that growth rate would result in $2.6 trillion of sales, 20 more years nearly $10 trillion.
Neither trees nor Apple can grow to the sky.
Their free cash flow margin is a healthy 18.7%. But, as happens to maturing companies, that margin has “normalized” from 22.1% five years ago.
FANGMAN’s sales growth rate will soon bend toward the trend of nominal GDP growth. That’s about 4% per year. Margins have already topped out.
There’s simply no prospect of “growing” into 30 times free cash flow multiples.
At the end of the day, the cash flow statement doesn’t lie.
Companies can flatter their top and bottom lines for a while with huge investments.
Items like “working capital” and “capital expenditures” don’t hit the profit and loss statement immediately.
But, eventually, you have to have a commensurate pick-up in free cash flow. Or you have profitless growth… and a consequent huge downshift in valuation.
FANGMAN’s soaring market cap is a sign of the destruction of honest price discovery.
It’s not evidence of a technology renaissance driving a healthy, growing market.
All told, Tech Bubble 2.0 has blown at least $2 trillion of bottled air into FANGMAN alone.
There is still no reason why the free cash flow multiple from June 2013 should have more than doubled.
If that more realistic 14 times free cash multiple prevailed, the FANGMAN stocks would be worth $1.9 trillion, not $4.2 trillion.
That’s about 55% of downside from here.
Folks, look out below…
The bubble logic driving tulipomania has since acquired a name: “the greater fool theory.” Although by any conventional measure it is folly to pay thousands for a tulip bulb (or for that matter an Internet stock), as long as there is an even greater fool out there willing to pay even more, doing so is the most logical thing in the world.
– Michael Pollan, The Botany of Desire: A Plant’s-Eye View of the World (2001)
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