To say we’ve been banging this drum for years is an understatement, but what’s going on in equity markets at the moment is truly nuts.
Following a start to year when stupid was at the steering wheel of stocks — whether it be the GameStop faux-revolution, Spac Jesus Chamath Palihapitiya framing himself as the next Warren Buffett, or any number of unproven electric vehicle companies coming to market and then exploding higher on no news — the trash trade seemed to have spun out of control.
After a pause in April, following February and March’s aggressive sell-off, the trash crash is back with a vengeance.
On Monday, the tape looked like the elevator scene in The Shining. The Nasdaq was down 2.55 per cent, with the FANG+ index — which includes Tesla, Alibaba and Baidu alongside Facebook etc — fell 3.61 per cent. However, below the surface of the mega-cap technology stocks there was even more carnage. Chamath Spac names like Open door (-10.32 per cent), Virgin Galactic (-8.47 per cent) and Clover Health (-4.32 per cent) all dipped under severe selling pressure. While once popular retail names such as futuristic insurer Lemonade (-10.18 per cent), software-as-a-service prom king Snowflake (-5.93 per cent) and Chinese electric car market Nio (-7.07%) also got caught in the crossfire. The pattern repeats across popular funds tied to these names, with ARK Invest’s ETF names suffering further losses, and the thinking man’s overpriced tech play — the £16bn UK-listed Scottish Mortgage Investment Trust — falling 6 per cent (and another 4 per cent this Tuesday morning.) The theme continued in Europe this morning, with the Stoxx 600 Tech down 2.7 per cent.
Attempts to attribute the market action to something, nay anything, have been widespread. FT Alphaville has heard the usual chatter of a rotation to value stocks, higher inflation expectations and a decline in retail activity as causes. They’re all, to an extent, valid reasons. Value stocks held up well in the US Monday, with utilities and household product names firmly in the green, while, on the inflation angle, the 30-year Treasury touched 2.35 per cent — its highest level since 2014. In Europe this morning, bond prices have also signalled concern over rising inflation. Retail activity has also been waning, with JPMorgan strategists noting on Friday a drop in retail order flow as a per cent of US equity trading volume in April versus the first 3 months of the year:
There is a simpler explanation, however. All of the trash stocks (and we exclude the core FANG names here) were, and still are, wildly overvalued relative to their economic power.
Let’s just give 3 examples. Electric truckmaker Workhorse Group delivered just six trucks in the first quarter of 2020 for the grand total of $521,000 of revenues, or $2m on an annualised basis. Its valuation? $1bn. And that’s after collapsing 15 per cent on Monday. Just under three months ago, it was worth $5bn.
The tale is repeated across the EV spectrum. Hydrogen fuel cell maker Plug Power is down 70 per cent from its winter peak. It told the market yesterday in a business update it expects to report $67m of net revenue in 2020s first quarter. At pixel time, its valuation is $12bn.
Away from the world of tangential ESG plays the story is the same. There’s almost too many stocks to pick from, but let’s go with GameStop. Despite being down 58 per cent from its peak market capitalisation of $24bn, the gaming retailer is still worth $11bn (even after a 11 per cent drop Monday). That’s despite recording both a 20 per cent drop in revenues, to $5bn, and negative Ebitda over the past 12 months, a period during which the launch of the PlayStation 5 and Xbox One should have, theoretically at least, been a tailwind for the business.
Despite some stocks having already lost more than two-thirds of their value, one can’t help but feel there’s still a severe stink of overvaluation in the air. By the looks of it, however, the garbage truck is backing up to the market, and the binmen are finally beginning to collect the trash.
At pixel time, the Nasdaq is down 1.2 per cent in pre-market trading.
Related LinksFT Alphaville presents: the EV bubble in real time — FT AlphavilleThis is nuts, where are the profits? — FT AlphavilleThere is no stock market bubble — FTTesla champion Ark Investment outguns Wall Street titans — FT Ark’s Cathie Wood dismisses bubble talk and Tesla doubters — FT Why it is usually a mistake for investors to take profits — FT