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Closing Thoughts For The Week - 4
The following write-up reflects only the authors opinions and should not be taken as investment advice. The piece is solely meant to be read for it’s entertainment value. Note, most of this post was written on wednesday before the massive crashes in the weed stocks had taken place. The author may own, buy and sell equities mentioned in this post.
(5 minute read)
The Nasdaq has entered correction territory (being down 10% peak to valley) and has given back some of its outperformance of the past 6 months. The DJX and the SPY have been outperforming lead by energy stocks.
While Exxon Mobil might seem cheap on the surface. It still holds 169B in liabilities, and its assets are mainly 233B in oil and gas related PPE making it very sensitive to oil prices.
Mega cap tech has held up fairly well, Google, Facebook and Amazon have outperformed the broader tech index.
Some tech names seem fairly cheap considering their earnings power and recurring revenues. The SaaS model is naturally inflation resistant, as the annual subscriptions simply get repriced in line with inflation. Adobe trades at 39x expected 2021 earnings and 29x 2023 expected earnings, and they are known to beat their estimates almost always. Adobe is a perfect example of the earnings power of a good SaaS business with high gross profit margins (86.62%). Ev to sales ratio is 16.23x.
A company such as Okta (34.33 ev/s) is twice as expensive as Adbe, but it is also expected to grow its topline twice as fast for the foreseeable future. It’s GPM are a little worse (73.94%) but they have been steadily rising over time and should eventually plateau around Adobes margins. Okta is thus more or less fairly valued around $200 and I can’t see how it’s supposedly a huge bubble considering its future potential massive earnings power. It’s by no means cheap here, and there is no margin of safety in case something “goes wrong”. So a buy here is still a bet that the flawless execution continues, because of it doesn’t $NEWR / $AYX have another spot next to them in the struggling SaaS graveyard.
This analysis framework applies to most high growth SaaS companies. I just used Okta as a tangible example.
Here is a plot showing the average multiples. Counterintuitively high growth SaaS multiples have pulled back the most, and are now at their september lows, while the mid and low growth baskets could have further downside before they reach that point.
Most spacs have pulled back massively. In any other market enviroment, these extremely specuative, often low quality and pre-revenue businesses would have been penny stocks. Unable to raise capital without diluting their shareholders massively. But for some reason, Covid spurred an enviroment where charlatans could charm the retail investor into handing them over their cash, in exchange for severely overpriced common stock. Going forward, as this bubble deflates further I fully expect many spacs to start trading below their $10 starting prices. And only when we start seeing spac deals dip below the $10 price upon the merger announcement would I say that the bubble has popped, and be confident buying into some of these again. Attached are a couple of charts of some hyped spacs that have gone horribly wrong for people who have chased their stocks.
That wraps up my closing thoughts for the week. Hope you enjoyed reading. See you next week!
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk, and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their research before executing any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.
The author owns shares in Okta at the time of this blog post's publication.