Stocks closed mixed Friday in a rather quiet trading session. Most of the news surrounded the rollout of the Covid-19 vaccine. U.S. shipments start today, but for most Americans who want to take the vaccine, it will likely be springtime before they have a chance. In the meantime, the latest surge continues, although there are indications in some of the hardest hit states in the Midwest that the contagion is starting to slow a bit. If there is a “surge upon surge” as some describe post-Thanksgiving expectations, this is the week that will become apparent.
Being a bull market Monday, there are several merger announcements, many involving stock at ebullient prices. But the big story last week was the reaction to the IPOs of DoorDash and Airbnb. I won’t argue that both are exciting young businesses with a lot of potential. Of course, potential and success are not synonyms. DoorDash faces lots of competition delivering meals and Airbnb is barely becoming profitable. But the valuations both achieved in what I can only call a speculative feeding frenzy is crazy. According to today’s Wall Street Journal, the new issue class of 2020 is selling at over 23 times revenues. Not earnings, revenues. In the 2000 dot com bubble, real companies like Microsoft# got a bit above 10 times revenues. And Microsoft was always profitable.
Today, DoorDash sells at a higher valuation than General Motors. Airbnb, which has less than a 1% share of the lodging market, now sells at a market cap larger than Marriott and Hilton, the two largest U.S. hotel chains, combined. Even if one assumes that Airbnb captures the dominant share of the segments of the hotel market it operates in within 5 years, something I believe no one is predicting, if valuation is based on the present value of future cash flows, the current price makes no sense.
That doesn’t mean Airbnb shares cannot go higher. As long as demand exceeds supply, the stock can keep going up. But ultimately, valuation matters. It always does. This time is no different.
I have been on this rant before. A year ago, I thought the valuation of Beyond Meat was insane. I still do. I was in a supermarket recently. The real meat counters are still quite a bit larger than the cooler that sells not only Beyond meat products but also Impossible Burgers, and a whole host of meat alternatives. But collectively all these products fit behind one door of a freezer compartment. McDonald’s still sells a lot more beef burgers than non-beef burgers. By a lot. We’ll see in 2-3 years how big this market really is and how dominant Beyond Meat may be. But to support a valuation anywhere near today’s it will have to be a lot more successful than the bulls contemplate.
Bulls will argue that this frenzy has a way to go. There aren’t many bears out there. From an economic point of view everything looks pretty bright, assuming the current virus surge doesn’t last beyond winter. We can fuss about the importance of another aid package, but that impact would only be a short-term patch anyway. I don’t mean to sound harsh; aid for restaurants that can serve meals indoors is crucial. But it simply doesn’t matter to the long- term economic picture.
But stock markets don’t always go up when earnings go up. In fact, of the 20 most recent years when earnings rose by 15% or more, stocks declined 9 times.
What we see today is a feeding frenzy that results from the massive inflows of money into financial markets. While the Fed wanted some of the newly created money to be spent on goods and services, no one buys an evening gown to attend a Zoom wedding. Plane travel is down 65%. Restaurants are dying. Department stores are going bankrupt. All the money in the world doesn’t matter if you are scared of getting seriously ill.
So, what happens when no one spends and rates are zero? You see the answer. It gets invested. It doesn’t matter whether it is stocks, bonds, art or bitcoins. And when too much money chases too little supply, you get a bubble.
When does the bubble end? Maybe today. Maybe next month. Maybe a year or two from now. Bulls like to think this is like 1998, early in the Internet bubble. Bears think it is March 2000, a few weeks before the bubble burst.
Two things are important to know. First, you can’t look at DoorDash and Airbnb and say there is no bubble. These stock prices are simply fanciful and don’t reflect real value. Again, they can double tomorrow. But that doesn’t rationalize their valuations. Second, not all stocks are in bubble territory. There are many out of favor groups, from big legacy tech companies to retail chains to banks to energy providers, that sell at steep discounts both to the market and to their own historic valuations. Granted, some have less than rosy outlooks. But none are capturing the speculative money chasing momentum.
So, what does one do? As Jim Cramer likes to say, bulls make money, bears make money, and pigs get slaughtered. If you are in one or more of these hot stocks and you have had a good run, take some money off the table. If you aren’t in them, think of them as pure speculations. You could double your money or you could lose it all. I may sound like an old coot to some, but I know I will be right. I just don’t know when. Neither does anyone else.
Oh, by the way, the Electoral College meets today. While there will still be some protests and legal efforts to the end, we are getting closer to the end of this period of political nonsense where the accusations keep flying but the evidence is scant. Not all of President-elect Biden’s cabinet choices will have an easy time getting approved. But the important ones will get done and soon we can focus on a national plan to facilitate the rational and, hopefully, rapid distribution of a vaccine that will bring this pandemic to a close before too long.
Today, former FBI Director James Comey turns 60. Actress and model Jane Birkin is 74.
James M. Meyer, CFA 610-260-2220