Bubble Party

Valuations back on top again

Hello everyone!

Today is just a small update. Seems that I now have a tradition of a yearly bubble market post after a big rally.

In 2021, when I made the post at the end of July, it took the market another 12% rally and six months to go down. For most of the bubble stocks, it was a local top, with ARK declining more than 30% after my post.

In 2022, I published the second post one year and one month after the first one. ARK climbed another 23% and ultimately went down 30% from the publishing date in the following months. Nasdaq went up 10% before declining 14%.

So, I am not great at timing that. Today we have another bubble market in my opinion. After a great last year, my portfolio is now getting killed, giving up a lot of the gains I made. I was short a lot, and didn't anticipate the violent moves. And violent moves they were.

For example, Tesla posted a gain of 98% YTD, despite earnings confirming that the growth story of 50% can't be realized - and then introducing price cuts, that would decrease their earnings by at least 40%. Now the move itself is irrational, but the size of it is astonishing. That gain means that Tesla's market cap increased by $323b in 1 1/2 months. That is the equivalent of a whole Toyota + one of the biggest battery producers, CATL.

Nvidia is even more baffling. The company is now trading way above their profit warning in July 2022, yet operating earnings were down 66% - with earnings coming up next week. All their competitors in the gaming space guided lower, and those in the datacenter and semi space like TSM, MSFT and AMD all guided towards lower growth. The company now trades at 19x P/S and more than 76x EV/EBITDA - which is very close to their October 2020 valuation of 89x EV/EBITDA when interest rates were basically 0, and growth was over 50%.

Then we have numerous companies that just lose money like Rivian and Plug Power. Companies like Upstart that lose money head over heels, revenues declining by 50% and still trading at baffling valuations. Other darlings like The Trading Desk, Shopify, Palantir all had big up moves as trading well above 10x P/S with growth starting to stall.

Today’s DoorDash earnings were shocking. Revenues up 35% but loses doubled to -370m in operating income and -640m net income. The more they sell, the more they lose - a broken business model. SBC (Share-based compensation) is 268m or 14% of revenues. They have announced a 750m share buy-back, though. The thing is, they already did that in May 2022 (and I even wrote about it then):

Doordash investment thesis is strong strong growth. The company has a $3.6b cash/short term investment cushion to strive towards that goal. Since they are not profitable, they deplete their cushion by buying back shares and admitting that their growth story is no more.

Since then, the outstanding shares have increased 10% with loses mounting and cash declining.

What is so baffling is that everything seems to be good news. Declining inflation is good news, when inflation came in hotter than expected for January that is good news as well. Declining earnings - good news. Rising interest rates, good news. Dollar falling, good news -  dollar rising, good news.

Now I think that the economy is much healthier than many bears do, however I think that the stock market isn't.

Given that earnings ex-energy have declined since the top in December 2021, the market now trades above that, all the while the fed fund rates have gone from 0.08% to 4.3%.