My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Revisiting the High Flyers

From early January until mid-March, I profiled 22 companies that I classified as “high flyers” because they were new, disruptive technology companies that had remarkable share performance in 2020 and early 2021. For reference, this list of high flyers is below.

There are some outstanding companies on this list, many of which will be highly successful in the long term. In fact, nearly all of these companies beat their top line and EPS consensus-analysts' estimates for the most recent quarter (which is the reason I was covering them). However, as we have seen over the last few weeks, in spite of many interesting and successful business models and strong operating results, investors have finally pushed back on valuations after an amazing and largely one-directional run for nearly all of the stocks in 2020. In fact, every one of these 22 companies is off of its 52-week high, even though they have also recovered from their February / early March lows, some very impressively. For reference, I am using closing stock prices as of April 6th, 2021, and giving we are in the middle of another “mini tech rally”, the data seems dated already!


Since most of these companies saw their share prices come off of early year lows, I thought it would be interesting to provide an update and to comment on the prospects for the 22 high flyers in the coming quarters. I wanted to also present their size and valuation metrics vis-à-vis the FAANG+M stocks, since these are considered “old school” names, as well as in comparison to a few indices and – of course – TSLA. The fact is that the combination of higher yields on US Treasuries, inflated valuations for the high flyers (i.e. valuations too far ahead of earnings) and rotation towards value, have all been detrimental to the high flyers (and technology stocks more broadly) over several weeks. However, as inflation concerns slowly slip into the background and UST yields stabilise, we feel like we are suddenly in the midst of another growth spurt.


This update will be organised into two sections. 1. Updates on share price performance and valuation metrics for the 22 high flyers. I also included metrics on ARKK (high flyer proxy) and TSLA, as well as on the FAANG+M stocks and a couple of indices I view as interesting benchmarks. Most of this data is contained in the first three tables.

2. An update on some qualitative factors, including how the pandemic affected these companies, and how the pending economic recovery might affect them going forward. I have included some comments on a few of the high flyers in the last two tables.


As my knowledge of these companies is not terribly deep, I would welcome – ­ in fact encourage ­­– comments from my readers, many of whom will be better informed than me. Please don’t be shy!


Summary of conclusions (before presenting tables)


Before presenting the very busy tables and charts, I wanted to offer some conclusions as to what has been occurring and what the future might bestow.


Returns and % 52-week high (table 1): Most of the high flyers have bounced off their lows of a few weeks ago, as you will see in the first table. 13 of the 22 have a positive YtD return, even though all are down from their 52-week highs, ranging from 54% to 94% (current price as % of 52-week high). To compare to the FAANG+M, only two of the six FAANG+M stocks have positive YtD returns, a lower percentage than the high flyers. The S&P 500 and the tech-heavy NASDAQ 100 have returned 8.6% and 5.7%, respectively, YtD, whilst the value-focused Russell 2000 has returned 12.6% (all ignoring dividends). Clearly, higher UST yields and inflated valuations have negatively affected tech across the board, as the return on the high flyers compared to the broader indices illustrates. As I mentioned earlier though, it feels like a mini “re-rotation” is occurring as I write this!


Size (table 2): The 22 high flyers are relatively small, as you can see in Table 2. In fact, three have market caps of less than $10 bln (APPN, FSLY and LMND), and another 10 have market caps between $10 bln and $50 bln. NVDA and SHOP are the two largest of the 22 by market cap, deservedly so given their metrics. Interestingly, NFLX looks as if it would tuck in nicely between NVDA and SHOP.


Valuations (table 3): The third table shows the valuations of the 22 high flyers, TLSA and FANNG+M by looking at market cap-to-forward sales. For context, if we look at the FAANG+M, this ratio ranges from 3.3x (AMZN) to 10.8x (MSFT). These companies are all substantially larger, more global, more mature, financially stronger, and bottom line profitable, very different from most of the high flyers. Of course, their growth is also less impressive than that of the high flyers, but this is a relative comment because – in an absolute sense – the revenue growth of the FAANG+M companies has been very strong. Using a simple arithmetic average of the growth in revenues between the most recent quarter and the same quarter one year ago (e.g. 4Q20 vs 4Q19), the FAANG+M companies had average revenue growth of 26.4% whilst the 22 high flyers had average revenue growth of 86.3%, more than three times higher. For reference, TSLA had Q-o-Q revenue growth of 46% and is trading at 13.3x forward revenues, very rich for an automotive company but somewhat average perhaps for a tech company, especially one that views itself as a high flyer. Rather than dwell on the valuations in Table 3, take a look yourself and come to your own conclusions. Clearly, some of the stocks remain very richly valued and are therefore vulnerable to downdrafts whether it is the market at large, higher UST yields, and / or continued rotation towards value and away from higher volatility names like many of these.


Pandemic "benefits" (table 4): For most of the high flyers, the pandemic provided a benefit in one form or another, some of which was transitory perhaps and some of which might prove to be permanent. I have provided my thoughts in a "pandemic effects" table. There were a handful of high flyers that suffered due to the pandemic, most notably perhaps ABNB and UBER, although the latter had Uber Eats to offset some of its decline in ride-sharing revenues. I view most of the internet / cloud / cybersecurity companies as pandemic neutral, although you could argue that pandemic-driven migration to more virtual formats – whether e-commerce / on-line shopping, streaming, gaming, virtual meetings, etc – was a slight positive. I see this as a trend whether there was a pandemic or not. Post-pandemic, most concerns might revolve around the home delivery companies (DASH, Uber Eats, Grub Hub, etc) and at-home exercise companies like PTON, as people gradually return to work and to their pre-pandemic routines.


Cyclicality / reflation (table 5): The recovering economy will also propel some of the high flyers, and potentially hold back others, as I present in the final table. As far as the pending economic uplift that is already underway, trends that were in place pre-pandemic (e-commerce growth at expense of high street, ride sharing, home sharing (ABNB), cybersecurity, cloud solutions, use of mobile apps, etc) will continue, and perhaps even accelerate. I see the biggest beneficiaries of the recovering economy being the same companies in fact that were hammered the hardest in the second-quarter 2020 as economies in many parts of the world were shuddered for weeks on end and travel stopped abruptly. ABNB and UBER are at the top of the list of the worst affected and should therefore be major beneficiaries of the recovery (although UBER will be dragged down by the decline of Uber Eats potentially, so LYFT remains a better US-focused ride-sharing play in my opinion). Similarly, as in-face dialogue, meetings and business travel resumes, even partially, names like ZM and DOCU could see their growth moderate, although I still expect that both companies – dominant in their markets – will continue to grow. I probably like DASH the least because I believe that the growth of their business could moderate post-pandemic, and none of the food delivery companies as of yet seem to know the formula for making money.


The First Three Tables: Share performance, size and valuation


As I mentioned in the opening section of this article, the tables below provide some valuation metrics for the 22 high flyers, the FAANG+M names, and for TSLA and ARKK. I have included three tables with these companies ranked three different ways:


1. Current price as a percent of 52-week high (from high to low)

2. Market value of each company (to give an idea of each companies’ size)

3. Market cap-to-forward sales for each company (to give an idea of each companies’ valuation)


All three tables include YtD returns and whether or not the companies were bottom-line profitable based on GAAP (notrestated earnings) in at least one of the last four quarters.

Table 1: Price, YtD Return and % 52-Week High


Table 2: Size (market capitalisation)


Table 3: Valuation (ratio market cap to forward revenues)

Pandemic and Recession/Reflation Comments


The chart below profiles how some of the 22 high flyers were affected by the pandemic. Sorry for the small print!


The last table below looks at the effects of a recovering economy on a subset of the 22 names.


Conclusion


There is so much more that would need to be covered to properly assess these 22 companies and the "right" price for their shares. The purpose of this article is not so much to provide a view on each company and their share price, but to give you a few tools – mostly technical – to reach your own conclusions. I am simply not close enough to the companies or industries to provide this. As I said throughout my work on these names over the last couple of months, they are expensive stocks and remain vulnerable to any sort of downdraft or general rotation towards value, a broad trend that has characterised the market now for several months. Use this time to get close to the companies you might like best but chose your entry points carefully.


DISCLOSURE: For the record, I am neither advising you to buy or sell any of the stocks I discussed in this paper. I (author) currently have long or short positions in ABNB, SQ, ROKU, PTON, SHOP, MTCH, MSFT, AMZN, AAPL, GOOGL, FB and ARKK.


 

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