Sunday, November 26, 2017

26/11/17: FAANGS+ Brewing up another markets storm


One of the key signals of a systemic mispricing of financial assets is concentration risk. I wrote about this in a number of posts on the blog, so no need repeating the obvious. Here is the latest fragment of evidence suggesting that we - the global financial markets and their investors - are at or near the top of froth when it comes to 'irrational exuberance':  http://www.zerohedge.com/news/2017-11-26/david-stockman-derides-delirious-dozen-2017.

So what should investors do? Some lessons from the GFC that can help are summarized here: http://trueeconomics.blogspot.com/2017/11/241117-learning-from-gfc-lessons-for.html. And some additional warning signs of the bubble are summarized here: http://trueeconomics.blogspot.com/2017/11/191117-next-global-financial-crisis.html.

Quote: "...our new Delirious Dozen consists of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) plus seven additional high flyers (Tesla, NVIDIA, Salesforce, Alibaba, UnitedHealth, Home Depot and Broadcom)."

What the above valuations imply?

  •  "Amazon is now valued at $550 billion and thereby trades at 293X its $1.9 billion of LTM net income" - EV/EBITDA ratio of x46.5
  • "Broadcom trades at 246X net income"
  • "Netflix is valued at 194X" or x107.8 EV/EBITDA ratio
  • "Salesforce (CRM) ... is currently valued at $77 billion, and Tesla, which sports a market cap of $54 billion. Yet both had large net losses during the latest 12 months. In fact, during the last five years, CRM has posted cumulative net losses of $650 million and Tesla has lost $3.3 billion." Enterprise Value/EBITDA for CRM is now x154; for Tesla: x80.7 after  the recent price drops.
  • NVIDIA sports EV/EBITDA ratio of x44.9 and Alibaba of x43.5
  • UnitedHealth is absolutely cheap at x13.3 EV/EBITDA as is Home Depot at x13.9 although the latter does sport a P/BV ratio of x57.3 and that is before it takes a full writedown on the 'value' of its stores, in lines with forward expectations of the changes in the retail environment in the near future
  • Facebook EV/EBITDA is x26.6 with expectations forward on earnings bringing trailing P/E ratio from x41 to x27.6 which is really equivalent to saying that there is no business cycle that can impact adversely Facebook's business any time soon.
  • Apple's EV/EBITDA is x13.3 - cheap by all 'FAANGS' measures, but forward relative to trailing P/Es imply earnings growth of at least 35-40 percent in 24 months horizon. Which is, again, suggesting no one should ever expect any clouds on Apple's horizon.
  • Google's EV/EBITDA is x19, while forward vs trailing P/E ratios imply earnings growth of at least 33-40 percent, similar to Apple's.
There is, quite clearly and transparently, an eyes wide shut moment for the markets. Greenspan might have called this the 'irrational exuberance', while your friendly sell-side broker will undoubtedly call it 'time to buy into the market' moment. But you have to have guts of steel and brain the size of a pea to not spot the trouble ahead with the current markets valuations.

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