Is the market crazy with valuations or am I?

DoorDash, DraftKings, Virgin Galactic valuations are out of this world.

I came across a Reddit threat yesterday arguing whether we are in a bubble. Many agreed that we might be, but cited that we don’t have the crazy valuations that were visible during the dotcom bubble. However, I can’t agree. There are many companies that are hugely overvalued  - not in the small obscure niches, but with market caps in the billions. Here are several astonishingly crazy valuations. 

DoorDash

As a beneficiary of the pandemic, DoorDash went public in December 2020 and has a current market cap of $57b. The pandemic was the perfect scenario for food-delivery companies like DoorDash. Nearly every country shut down its economies and restaurants switched to deliver their meals. Revenues tripled to just shy of $3b, yet DoorDash wasn’t able to make a profit. With the advance of vaccination programs and the reopening of restaurants, I can’t imagine a scenario where delivery numbers would increase in numbers that could justify the current valuations - except for a new virus strain. If you have a bull case to justify DoorDash valuations, comment or write to me on Twitter @InvestRoiss.

Virgin Galactic

“In a speculative market, what counts is imagination and not valuations.” A sentence that describes the current market frenzy to a T. While there has been a slight pullback in February and March in unprofitable, highly valued companies, speculation is back in full force. One of those companies is Virgin Galactic, who wants to send people into space, giving them the feeling of astronauts. After a successful test flight, the FAA approved the ship and the market cap of the company soared to $13b. In 2020 the company had $238,000 in revenue and $644m in losses. Not only will it hard to justify the price, as tickets cost around $250,000 and the spaceship can only transport 6 passengers, the company doesn’t actually fly into outer space. In their latest test the space ship reached an altitude of 55.45 miles (89km). Definitions on what is space vary widely even in the US. The U.S Air Force, FAA and NASA use 50 miles (80km) as the boundary, while NASA Mission Control uses 76 miles (122km). The most widely accepted definition internationally is the Kármán line at 82 miles (100km). So in contrast to the vessel, the valuations are really out of this world.

Draftkings 

A Reddit favourite: Online gambling is on the rise, no doubt - but what are realistic expectations? Draftkings valued at $21b defies those. Besides the Hindenburg short report that alleges illegal activities, Draftkings valuations make no sense. The UK gambles more than other European countries, so I use their average gambling numbers applied to the US population to show how absurd Draftkings valuation is. 

47% of Brits have gambled in the last 4 weeks. On average, Brits spend £2.60 per week on gambling, totaling over £135.20 per year. Online gambling accounted for 38% of the UK total gambling market. However, that is the total gambling market including casinos, sport betting, etc. Exchanging the currency it is180$ per person and the online percentage would be around $68. In 2015, sports betting made 45% of all online gambling in the UK, so we now have around $30 per person. The US has around 320 million people. Multiple $30 with 320 and we get 9600 million spend in the US on online Sports-betting. Which would be 9.5 billion for the whole industry in sales. In the UK profit margins are: William Hill 4.5% and Playtec is negative but has around 5% operating margins. These have several offline branches as well, so we say 12% is profit which is extremely generous over the long run because of promotions and advertisements. Taking the theoretical size of $9.5b of online sports-betting and applying 12% (which is very generous) would be around 1.14b in profits. Even if it would be double, it is still a low number. Average P/E ratio of InternetB2C betting sites was 15.6 from 1999 to 2016, according to Credit Suisse, values the online sport betting industry at $16b. Even doubling the P/E ratio, the online sports betting industry would be valued at $32b. The market cap of DraftKings at $21b is very close to the theoretical industry of mad gambling Brits with US numbers. There is no clear market leader in the UK, as users switch to the site with the best odds. So while the opportunity seems to be there, the price is already ahead of itself. 

Crypto  

That crypto valuations can be crazy is nothing new.Artist Beeple sold an NFT for $69m. NFTs are non-fungible tokens are a blockchain technology that can verify the ownership of a digital file. Ownership doesn’t always come with the usage or royalty rights, making it a bragging right with no actual use case or investment return. Crypto-exchange Coinbase valuation at IPO ($85b) was higher than the Intercontinental Exchange, who owns the New York Stock Exchange. Peter Thiel, founder of Paypal and Palantir, has backed a crypto exchange which is now in SPAC merger talks, and valued at $12b. The exchange launched in May 2021. Okay then. 

My thoughts

There are quite a few parts of the market that are in bubbles. How long it will go on or will it ever pop? I think it is useless to predict and Peter Lynch agrees. 

“I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”

- Peter Lynch

Economists predicted we will have a recession because Americans saved too little, now they predict we will have a recession because they save too much. It is probably best to avoid the noise and ignore forecasts completely. Valuing businesses on an individual level is easier and faster than trying to forecast what the FED will do to interest rates or how trading relations between the US and China develop. Focusing on the principles of value investing and requiring a big margin of safety (even if it is hard to find) is probably the best way forward.