Friday, December 9, 2022

What is causing the decline in high-growth technology stocks?

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A few reasons…

  1. The Federal Reserve is reducing liquidity (slowing the speed at which money is printed) and raising interest rates at the same time.
  2. Many high-growth technology companies do not have a clear path to profitability, and their stock prices are trading at ridiculously high valuations.
  3. Because of the Federal Reserve’s infusion of liquidity (money printing) and the low interest rate environment, large amounts of capital have been pouring into technology equities.

Take a look below…

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In order to maintain the cyclical character of liquidity cycles, market cycles, and business cycles, whatever comes in must unavoidably come out again and again.

Now, to illustrate exactly how ludicrous high-growth tech companies have become in terms of value, we may look at the case of Peloton.

Take a look below…

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On January 13, 2021, the stock of Peloton achieved an all-time high of $167.42 per share.

That’s almost 5 times the price of each share now (as of the time of this writing), implying that Peloton’s market capitalization peaked at $55 billion.

Here are Peloton’s income projections for 2020 (in millions of dollars)…

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When you add them all together, you get… $2.954 billion in revenue in 2020.

As a result, with a market capitalization of $55 billion, the price-to-sales ratio of Peloton was $55 billion divided by $2.95 billion, or 18.64 times.

According to an 18.64x revenue multiple, the firm will have to pay investors 186.4 percent of revenues for ten consecutive years in dividends in order to achieve a 10-year payback.

This presupposes that the firm has $0 in cost of products sold (which is impossible), $0 in SG&A expenditures (which is impossible), $0 in taxes (which is impossible), and $0 in research and development (possible, but impossible for high-growth tech, as the industry is so cut-throat). AND, on top of that, it is assumed that the firm will be able to sustain its present pace of sales growth.

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Peloton would have been prohibitively costly even if sales had increased by a factor of ten. Despite this, there were others who just continued to pour money into the stock.

When you consider the inflationary macroeconomic background for the 2020s, it becomes evident where capital will have to flow out of (technology) and into other sectors (commodities, energy, value).

Therefore, it is just too dangerous not to be long commodities throughout the decade of the 2020s.

Look at how very inexpensive they are when compared to other investments…

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  1. Commodities are an excellent inflation hedge – Consider how much money is being printed, and how positive this is for commodities in general.
  2. They are required by society – The vast majority of the products you use are created from commodities, whether it is the lithium in your mobile phone battery or the copper in your charging line.
  3. The importance of energy security to political security cannot be overstated. Energy security is political security, particularly in today’s globe, which is moving away from globalization.
  4. It is a question of when, not if, commodity prices would increase. Consider all of the infrastructure projects that will be undertaken as a result of fiscal measures, as well as the exponential growth in GDP per capita in India.
  5. You should avoid them as an asset class since they are very volatile and trade at a significant distance from their historical mean – Mean reversion occurs in the market regardless of whether you like it or not.

Mark my words…

Investing in commodities, energy, and value stocks will be one of the biggest wealth-creation possibilities in history, providing you are on the right side of the capital flow, which will be one of the most profitable markets in history.

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