Are you a sensible investor? Then you are almost certainly having a few thoughts about technology stocks, including regret, regret at not holding technology stocks, and regret at not holding Afterpay which is up 856% from the low in March and up 38% in 9 trading days.
You are probably beginning to question whether you are sensible, or stupid. It is hard to know. Is it sensible or stupid to buy or hold Afterpay on a PE of minus 454x this year, and 237x on 2022 forecasts.
And there are other stocks making you look stupid. Like XRO on a PE of 370x and 98x on 2022 forecasts, REA on 52x and 35x 2022 earnings in the middle of a housing slump, WTC on 93x and 50x on 2022 earnings forecasts, NXT on minus 305x and 231x 2022 forecasts, ALU on 70x and 42x 2022 forecasts and APX on 56x and 32x 2022 forecasts.
But this is not about price, PE, future earnings or intrinsic value, it is about not missing out on easy gains, it is about exploiting extraordinary volatility, and the momentum behind that opportunity is overwhelming the rest of the market,
it is overwhelming the virus concerns, and it has taken the US stock market
to all-time highs when logic suggests the equity market should be cowed by a
global economic disaster.
Tesla is now bigger than BMW and Mercedes (Daimler) combined. The FAANG stocks plus Microsoft account for 27% of the S&P 500 but only 8% of the revenue. The equity market in the US is valued at 152.2% of GDP - a record.
The bond market is three times the size of the equity market. US bond yields are at record lows and discounting negative rates from mid 2021 to 2023 despite the Fed saying they will resist that. The equity market is not reflecting the bond market. Record low bond yields are not consistent with a V-Shaped recovery.
Which market is right?
I hate finger-waggers. I hate the pious value based investors that miss out on everything because they are long-term and want to see "value" before they buy, but this rally is offending not just them.
These stocks are being traded as a bloc by the herd. It is not discriminating between really very diverse companies. They are all flying because the US technology sector is flying, and because the alternative investments in Australia are not sexy.
Banks, Staples, Healthcare, Resources. Slow going by comparison. So technology it is, globally, for a quick buck. Even the Chinese market is flying on short term speculative retail buying.
Unfortunately for most sensible (or stupid?) investors, the most compelling argument for an 'investment' in these stocks is momentum. This is a herd phenomenon.
The good news, for research-based, value discerning, Australian fund managers, is that this is a small sector in Australia, otherwise they would be under-performing terribly because of their long-standing, traditional, proven investment techniques that would almost certainly dictate that they do not hold them. But in the US, this is a massive sector, and it too is being pursued higher because S&P 500 benchmarked fund managers can't afford to ignore a massive sector with momentum, whatever the price.
Are they overvalued? I ask you this.
Do you think the CEOs and shareholders of these companies think they are undervalued? No. They are punching the air in delight. And that means one thing. And the APT Management know it. That’s why they are raising capital, and that’s why they are selling some stock.
AS FOR THE BROKERS - don't be too impressed.
This week's high profile, post capital-raising, $101 plus valuation on APT, up from a woefully wrong $36, along with all the other amazing broker valuations, optimism and target prices are all part of a big financial game. And you should not be surprised.
This is how broking works. "Get in the game" would be the instruction from the corporate department to the analyst, from the CEO to the analyst, from the dealers to the analyst. Print that click bait research! If they don't they will miss out on some of the best money making opportunities brokers have had in years. Making trades in a high volume frenzy, and raising capital on the back of flying share prices.
This is not about getting it right, its about having research that attracts attention. Its about attracting trades and its about endearing yourself to companies that are almost certainly going to be doing further capital raisings at these extraordinary share prices.
You have to be at the table when the deals come through, you have to be on the phone to the management of these companies telling them this is a once in a lifetime opportunity to firm up the balance sheet once and for all, to lock in the next five years of funding.
Its worth millions in corporate fees. But you won’t get the deal with a $36 target price. You won’t get the deal saying its expensive. You won’t get the deal saying sell. It’s a game.
And the not as hot to trot charts:
Even my colleague Henry at Marcus Today, a man who likes to do 200 miles an hour with his hair on fire, has started talking about a tech bubble. Because he, like me, has been through one before.
There are similarities. In the 2000 Tech Boom, as now, any finger-wagging cost you a fortune in missed opportunity.
And there are differences. This time there are some very substantial revenue, earnings and profits
backing these companies, in 2000 there was nothing but wind.
But even now, even when a company is real, and profitable, there is a price for everything, whatever the prospects, quality, growth potential.
A Porsche is a great car, just as Afterpay is a great company, but you wouldn’t pay $1,000,000 for a Porsche.
You also don't pay the eventual price for a house that is going to be built, up front. Until it is finished and inspected there are risks. In the resources boom from 2004 to 2009, BHP went from $7 to $43. It did not jump from $7 to $43 in 2004. It takes time for the market to trust a company and its value. Sometimes it "Trusteth too much" and too soon.
The market overprices assets regularly. It is doing it now. This is a sentiment extreme. This is not the time to join in. Buy when others are fearful, not greedy..and all that - and there I go, quoting Warren Buffett. I hate people quoting Warren Buffett!
DO NOT SELL YET
For those of you holding a tech stock or ten - don't sell yet. Straight up the advice has to be, trade this rally don’t ‘invest’ in it. This is a wonderful moment for those of you holding these stocks. If I was invested in Afterpay (any of them) I would not be selling, but I would not be making any grand declarations either, about the long-term, about why they are worth buying. I would not be developing faith. This bubble will burst, watch it. BUT - Don’t sell because these stocks have gone up a lot, wait. You never need to predict the top, just wait for the top. The day they fall 10%. That’ll mark the moment. No need to do anything until that day. Enjoy the ride until then.
FOR THOSE THAT ARE MISSING OUT
Don't worry. APT is the stock for everyone that missed out on A2M. A2M was the stock for everyone that missed out on BKL. And so it goes on.
There is another APT on your screen, right in front of you, right now. A company with tremendous opportunity, scalability, and it is almost certainly a technology company. All you have to do is spot it.
I can see my next click bait article - "The next Afterpay" although I'll probably call it "Warren Buffett and his ten reasons for buying the next Afterpay". I'm not stupid.
Any ideas anyone?
Great balanced take on this marcus. Im invested in EML which is profitable and watch it languish whilst some other tech, debt laden and cash burning fly.Your post cuts through the noise.
Very interesting article. As always, Marcus is a straight talker. Well done! I have been a holder of Afterpay since the beginning if 2018. I am a fan of tech companies but I tend to buy and hold instead of going in and out frequently. As shown in Marcus's charts, even for those on top of their games, the share price of tech companies are very volatile and they are not for the faint harted. But I firmly believe as long as you pick the right horse and have the patience, you will be rewarded handsomely. You are basically compensated for hold those high beta stocks and endure high level of anxiety along the way. Just like everything in our lives, there is no guarantee of a happy endding. But I have total faith in Afterpay. Their execution so far is flawless and the management team is world class. I guess the end game for the BNPL sector is that it's a competition of scale and more likely than not, Afterpay will stand to be one of those big winners.
Love your stuff usually Marcus but I must disagree. With the media and most brokers having been utterly wrong about growth, bad debts, competition, regulation, and the fragility of BNPL funding, you're suggesting investors should suddenly listen to those people calling it a bubble? The same people who said it was a bubble at $8, $15, $20, $50, $60 etc... Why not do a valuation based on Afterpay reaching the ANZ penetration it has in all its markets. A best case scenario. Look at Amazon and then go read articles from just before tech bubble popped... They certainly didn't foresee $3000+! Just my opinion as a lowly retail investor and not advice to anyone.
I don't disagree the fact that there is an element of speculation in the APT share price. But let's not forget: first, growth is worth more in this low growth world; second, the structural shift of consumers shying away from credit card products is accelerating. It is hard to see either of those two factors will materially change in the next few years. So the investment thesis is still stacking up.
Thanks Marcus – great article as always. I guess another difference between now and 2000 is the Robinhood factor, the crazy momentum from the huge influx of new investors.
I would become edgey at a 5%+ fall; WTC is already struggling ! BWKR.
Great article. Got into APT March '19, took all profits October '19. Still going up. Don't really have a plan now
Hi Simon James - I hear you - Truth is...it’s not about the ‘true’ value - no-one knows that, and it’s not about the Long-term - it’s about trading a great stock - and on that front - you can sell it to buy it again - don't wear a 40% drop because of the ‘long term’ - it’s about making money at every opportunity not being right in the long term.
Hi Jack Liang - Love the idea “you are rewarded for your high anxiety” - brilliant interpretation of the price of success. Might have to steal that....if only we were always rewarded for anxiety! I’d be a billionaire! 😩😆
For everyone that missed APT...there is always another APT - just as APT was the stock for everyone that missed A2M - any suggestions what the next glory stock is? (not in BNPL)
Love your feedback Marcus.
Hi Marcus, I would like to know more about trend reversals. You mentioned 10% drop will likely signal reversal, may I ask if in your experience do trends reverse when a day comes with very high relative volume and movement in direction opposite to the trend? E.g. I remember banks suffering badly in May as the rest of the market went to the moon, I held banks and sold on the first day of the sector rotation in late May because I had no experience with trend reversal/sector rotation before. Whats worse was I still held CSL after I sold banks, it was going sideways range bound in late April to May, and trend went down on very high volume in the last 2 days of May, exactly at the time banks went to the moon. So you can understand my desire to learn about trend reversal. Thanks.
What people tend to forget in all this is that the BNPL sector is trending to eat into the Credit card market. So for now that market is being nibbled at but in five years time that nibble will be a chunk and the prime BNPL players will be those that expand into new territories as soon as possible. At the Zip AGM December 2018 I suggested that they should jump into NZ as their market was just waiting to be tapped and the answer was "No" we are consolidating our place in the Australian market. Fortunately it was not all that long before they were there assimilating with the local player and now with the takeover of Quadpay will integrate rapidly into the US and Uk market. That's the game Marcus, and that's why the rise in valuation.....become one of the incumbents and make it harder for new players to catch up.
I dont know what to do now. I missed all the tech stocks and bought all the travel/oil stocks for a recovery but they seem to be all tipping over. This investment game is hard.
Marcus having worked at IBM when the PC was introduced and the lack of understanding then of technological change I think you miss an important point about the future way business will work. There is a paradigm shift happening in how business (banks et al) will be working in the future.
TYR perhaps Marcus? Thoughts?
You are right! "Banks, Staples, Healthcare, Resources." makes millenials YAWN!!! Investing in sexy game changing companies that millenials understand is way better!
Hi Chad Chad - Technical analysis is a commodity that is well worth the learning. There is no trend reversal golden bullet - most of technical analysis is about picking the changes in direction, the pivot points. One way to learn is to buy Omnitrader or Metastock and do the Educational videos that come with them. We are about to launch a technical analysis education course online.
Hi Nicholas Callanan - Let me let you in on a secret Nicholas - there is a thing called the "One line Discuss email" in our industry - it strikes terror into our hearts - it refers to a one line email that creates an hours work and seven years of liability in ten seconds. Having said that...email email@example.com - he loves that sort of question!
Great article as usual Marcus. BNPL is not a revolutionary shift in 'how we do business'. It is basically a credit card with a payment plan that is currently loss-making (with the exception of the old player FXL). I can't see any fundamental shift taking root when those in the existing credit space can, will (and are) making a shift to align with this 'managed payments' trend.
Hi Marcus. I read your article with interest. At first, I was highly sceptical about the buy now - pay later companies but i had a quick change of mind. I too felt it was just another 'tech bubble' as I saw in 1997-2000 era. I am interested to hear your thoughts. I see scope for the buy now pay later industry to be sustainable into the future. I mean there's no interest, you don't need a credit rating to use Afterpay or Sezzle etc. So this seems to be 'nirvana' for millenials to make their purchases of music, food, more music and just about everything else us older folk pay cash for etc etc. I did some research quickly after seeing APT skyrocket. Most new businesses do not make a profit immediately so could the industry potentially continue, albeit APT is bound to fall back in price (Covid effect pushing valuations up atm) but it might not spell the end of the business or the industry's other companies. I can see this industry being sustainable long term and having its own place in the finance industry. Your thoughts please?
Great article Marcus . I got into APT 2018 July, August ,Oct in their last SPP, went through nervous times with microscope stuff from royal commission, APT came out clean as a whistle. I am a big fan of APT model, thats why I got on early , millennials cant resist to get 'stuff' today and pay it later, silly buggers, no harm in me 'riding their pony tho' . The fluffed up valuation as outlined by your article, is nothing but FOMO , its not worth it based on basics...but I will take it anyway. As a retiree, I couldn't resist 600% profit and I sold down some and high -fived myself. I will let the rest run and maybe sell all if it gets too good to be true, when the bubble bursts, which it will ,I will jump back in a heatbeat as the business model and their aquisition prospects are bound to achieve great things in the future. Go you good thing!
Hi Edward - Sorry - Please refer my Nicholas Callanan reply above :-)
The next Afterpay could be Splitit SPT with its joint venture deal with Mastercard announced a couple of weeks ago.
You did not mention the SPP (share purchase plan)... what is your advice to investors eligible for $20,000 shares thru the SPP at a max price of $66?...Sell 300 shares now at $75 and buy them back at $66 via SPP?...
Don't forget the strong likelihood that you will be scaled back in any SPP. In the Jan2020 SPP a bid for the $15,000 maximum resulted in 85 shares @$23 for a total of just $1,955 invested. The more the current price exceeds the SPP price, the more popular it will be and the larger the likely scale back.
Great article . Totally agree and confess I have been seeing it as a bubble to juice as much as I can . In the meantime my PNV stock which continues to make profit and see its product spread globally remains flat! I also recall the momentum buying with the dot.com disaster. Its spooky to see the same old up talk for ridiculous valuations. Morgan Stanley buys a whole lot last week then raises its price for the stock. The rush to buy by people new to investing in all tech stock will leave some crashed after all the stimulus is gone and hard reality starts sinking in. This is going to be an L shaped recovery and if we can see improvements starting in 2022 then that would be lucky.
The acceleration of the APT share price is in direct comparison to the financial results. The revenue doubled so the share price doubled. If it is a bubble now then it was also a bubble in January.
Great common sense per usual, the rarest commodity of all !
Hi Marcus! I don't understand what is such fascination with the BNPL business model in Ozz . This business model has been known and operating for many years by the big banks in developing countries such as South America.
Marcus, always love reading your refreshing and at times contrarian views and thoughts like with the recent Afterpay article. It gives one pause for thought in the middle of all the white noise around us in the market. Douglas
Fantastic article Marcus! I even told my wife and son to read it as she still gets annoyed at the time my son wanted to invest but I said it was too expensive when it was ~$5 With regard to "the day they fall 10%".... well there was six of those days in March. It fell 11% over four days in December, 23% over four days in October and 17% over four days in August. It appears pandemic fear and four day sell offs don't count even though the October sell off was the threat of government regulation from memory. So what is it that will burst the bubble for good?
Hi Tony Yates - Good point - 10% may not enough to mark the "Big Top" but it would certainly have my finger hovering over the sell button. What prompts an individual investor (trader?) to sell will be different for everyone, there is no single proven golden bullet. I suggest everyone does what we do, just wake up every morning and make decisions. One day you might decide to sell and it won't necessarily be a 10% drop, it'll be combination of a lot of factors, the newsflow, an event. We won't know until we get there, and even when we do sell, it will be done on a distillation of probabilities, not a certainty. You'll know when you've got it wrong because someone that took no risk, made no decisions, wasn't involved at the time and doesn't have the right to criticise you, will point out that you are an idiot (often publicly on anti-social media) using the brilliance of hindsight. Take it from me! The best you can do is the best you can do at the time when presented with the circumstances you were presented with. Good luck Tony. Maybe ask your wife whether you should sell next time...let her wear the burden of decision next time!
Here we go again! I'm reading a few comments justifying -2,000% PE and seeing price charts, like Tesla's, resembling a Falcon 9 launch. Leading Sell indicators if ever there were any.
Hi Marcus, Like your article so much, up to your highest standard. The market is always trickie my mentor told me that many years ago. My view is based around the interesting comments from the subscribers and general market participants, and this is for those participants. Fascinating Really. Why?? The market is the market, and if you do not bend with the market you will miss the opportunities being presenterd because of your rigid opinions. The market does not care about your opinions. Marcus. To me it is so very interesting because of your thought provoking ideas based obviously around your general knowledge and experienceas a professional, which is being provided for free. Thank you very much. I am a true believer! For me the most important aspect is the lack of inclusion in the submitted articles covering the charts. In comparison to my reading of those charts you supplied. Especially when I went into my Dinasour 2003 Metastock basic charting program I use, and what they are telling me in the clues being providing in relation to simple Price/Volume action?. Surprisingly there is so little feedback comment covering the charting and yet you placed so much intention on the number of "Some Charts" included. I am a growth stock investor who uses Charts to provide guidance as to what the professionals are doing in relation to Price/Volume Action in those charts. This to me is about the clues left by professionals buying, and the professionals selling of these growth stocks!! Hardly anyone has touched/discussed these aspects which I find a bit odd in relation to my trading style covering the simple buy valid breakouts on the charts, and trying to sell when the pros are selling. My Edge. Selling especially being of so very little importance in the discussions, and without a doubt I believe the most difficult of all to do.!!! I will probably spend the rest of my life working on specialising on it. Better to be trying to educate myself and doing that than having an opinion. So from my point of view we have all the replies covering this and that, yet the most important part of "My Edge in the Market" is in the Charts covering the price/volume action and being able to use that to my advantage to buy at exactly the right time based on my technical analyses, and same on executing selling on my technical analyses from the clues being left in the charts by professionals, for all to see. Selling is the hardest!!! Not much mention of it, yet if you are in some of these stocks it is about protecting profits and capital. Am I missing something here?? Noel E Amateur Chartist and Growth Stock Investor
I believe BNPL is the future. Zip and Afterpay are the front runners. They are expanding fast into new markets. They have benefited from Covid and will benefit for many years to come. Credit cards suffering and will continue to.