(Ed note: first published in Dec 2017) In our 'Christmas Cracker' series, we've brought you a top insight for 2018 from one of our contributors each morning through December. The final Cracker for 2017, is written by Steve Johnson, Forager Funds.
Keeping your head when others lose theirs
“Nothing so undermines your financial judgement as the sight of your neighbour getting rich.” - John Pierpont Morgan
Although it has been more than a century since Morgan's words, little has changed about human nature. The main difference being that, in our digitally connected world, we have a lot more neighbours.
As 2017 comes to a close, I’m seeing more of my “neighbours” apparently making fortunes. And increasing signs of impaired financial judgement as a result. Granted, this is a bull market that is now more the eight years old. For most of that period, however, it has been a reluctant and nervous bull market.
The arguments between bulls and bears have been grounded in logic. The bears have argued that company earnings are unsustainably high and that multiples are well above long-term averages. The bulls countered that interest rates were lower than historical averages, likely to stay that way and that equities were relatively cheap as a result.
Both of those arguments have merit and you could have a well-considered reason for being on either side of the fence (or, in my case, sitting on top of it).
The back half of 2017 however has seen an increase in something more common in previous bull markets: mania. Crypto-currencies are the most obvious manifestation. Not since the 2000 tech bubble have I seen so many people talking about and speculating in something they know absolutely nothing about. But it is becoming increasingly prevalent in the stock market too.
Get wary of GetSwift
ASX-listed GetSwift is a logistics software startup with a fully-diluted market capitalisation of roughly half a billion dollars.
Despite generating less than $1 million of revenue last year, a flurry of ASX announcements has investors excited. Particularly the one stating that “GetSwift is pleased to announce that it has signed a global master services agreement with Amazon.”
Even the bulls of yesteryear would have been sceptical. One can only assume this is the same Amazon that built the world’s most sophisticated cloud computing service because it couldn’t find an offering that met its requirements. The same Amazon that already offers same day delivery to more than 8,000 cities and towns. The same Amazon that spent US$21 billion on research and development in the past 12 months.
I will be very surprised if Amazon buys logistics software off anyone. Let alone an Australian minnow with less than $1m of revenue.
In the mania of late 2017, however, it is being lapped up. The GetSwift share price has rocketed from $0.25 at listing to $4.00 at the time of a recent capital raising. It was up 84% on the day of the Amazon announcement.
The more this sort of thing happens, the more formerly rational people feel like they are missing out on something. And the more likely they are to do something stupid.
Keeping your head while others lose theirs, then, is likely to be the one biggest challenge in 2018. Prepare to be called a dinosaur, to be accused of not understanding that this time it is different and for periods of underperformance. There is every chance we are about to experience a real bull market.
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Clarity and wisdom.
Could Amazon buy out their technology?
I think your analysis is spot on. I had GetSwift shares (bought at .895 cents) but sold between 2 and 3 dollars. I was a happy seller. I couldn't believe a company that makes almost no money had risen so quickly and was capitalised at so much. They would need to add (if I remember correctly) a billion deliveries to make 80 million in revenue. Just as worrying are their announcements that offer so much but say so little. Concerning the mania around cryptocurrencies I would also add the mania in Australia in the second half of 2017 for lithium stocks and pot stocks. One advisory firm I know of has created an entire stock picking service devoted just to pot stocks.
Hmm. I agree with your logic, however, disagree with GSW. The market has ascribed no value to GSW's pipeline. If the N.A Williams deal gets implemented that alone will generate circa $140m in revenue p.a. Afterpay Touch seems to be a comparable in my mind with it's disruption in the marketplace.
I also agree with your general point but am less attracted to your view of Getswift. Only a week ago institutional investors paid $4 per share in an oversubscribed placement of eighteen million shares. Can all the professional analysts behind those institutions' decisions be so out of touch?
I hope you are right and I am wrong. I have no financial interest and the more Aussie tech successes the better. But don't think for a second that because there is institutional money involved it has to all be legitimate. Check out the 1PG announcements and capital raise from 2015 if you need a good example.
Thanks Steve, fair point.
GSW shareholders think Amazon will pay them $1b per year to use their app. This is an extraordinary delusion. Their MOU with Amazon, while better than nothing, is almost worthless.
Hi guys, Enjoying the service very much. Just a question re Steve Forager’s remarks on GSW. I am doing some research on the Company and it’s announcements for my personal investing. Steve remarks (in Q’nA section) that the legitimacy of the Cap raise is maybe questionable. He points to the 1PG Cap Raise back in 2015 as an example. Is he suggesting that these particular Raisings are perhaps not fair dinkum? Is that even possible? Scary because I’ve always felt raising at a certain price gives at least some credibility to a Company’s valuation (at a point in time, at least). I think this would suck in a lot of investors.
Hi Jim. The capital raising is real - I've never seen that part made up. I just wouldn't put too much faith in it as a positive sign. If fact, with something like Getswift, it can be a very effective way to cash in on the hype you have created. You can't sell your shares - that would freak everyone out and the founders are often restricted in any case - but you can use the high share price to get some cash in the bank. Even if the product turns out to be near worthless, Getswift's founders now control a company with almost $100m cash in the bank (for now).