Wednesday, December 9, 2020

Virtual Economy Downgraded To Strong Crash

On Monday I wrote that it doesn't make sense to see the COVID-19 pandemic Tech stocks melting-up at the same time as cyclicals are pricing in the end of the pandemic. Today, JP Morgan downgraded the virtual economy to strong explosion...

In addition to Zoom video, JP Morgan downgraded Crowdstrike, Palo Alto Networks, Okta and several other virtual economy stocks. The analysts are comparing this period to late 2009 early 2010 when the growth stocks started lagging cyclicals:

"The upside potential in Zoom Video is likely limited going forward as mass vaccinations for the COVID-19 virus could put a dent in the firm's business, according to a Wednesday note from JPMorgan"

According to JPMorgan, the environment is ripe for a similar setup seen a decade ago, when the highest multiple stocks at the end of 2009 underperformed in the following year"

Zoom stock peaked over a month ago and is down -30% from its highs. In their most recent quarter, revenue grew 400% year over year, however as one would expect their growth rate has started to slow recently. One would have to be delusional to believe that post-pandemic this stock will continue growing at the pandemic-accelerated growth rate:

"While Zoom expects to keep reporting huge numbers next quarter, there are signs its period of immense and rapid growth is over"


This is what we are going to see from all of these pandemic "safe havens". They artificially benefited from the decimation of the real economy. And now, as the vaccine rolls out, these bubble stocks will implode. The pandemic was a one time surge in cannibalized growth.

Which gets us to today's Doordash IPO which finally opened for trading on Wednesday afternoon. The stock gapped up 80% to $182 ($60 billion market cap) at the open from their Tuesday pricing at $102 which was raised from last week's estimated IPO price of $75, which was twice what they priced at in June ($16 billion). Got that? Basically, this company that delivers food in a pandemic has increased 600% in value over the past six months.

This one stock is a poster child for the lethal economic and financial distortions created by this pandemic. While the real economy is imploding and restaurants are shutting down at a record rate, Wall Street accords insane valuations to the companies that are now feeding off the carcass of the real economy. 

"It took a global pandemic to drive the firm's one quarter (ended June 30, 2020) of GAAP profitability. The firm has not been profitable since, and we think it may never be"

The sad irony of this so-called business model is that these delivery apps which take up to a 30% commission are accelerating the demise of restaurants: 

“The fees are just too high. Restaurant profit margins are maybe 5% on average. Then to have a delivery service charge between 20% and 30% is just crazy. And the way they present themselves: ‘You’re going to get so many more orders.’ 1,000 orders at 30% off does not help.”

The new virtual economy is merely the cannibalization of the real economy now at a pandemic accelerated rate. So what to do, accord these stocks ridiculous valuations based on their pandemic-accelerated growth rates.

At least in the Dotcom era we could pretend that the growth rates were long-term. In 2000, we were told that Cisco would growth internet bandwidth revenue at a 30% growth rate for a decade and that the company would be worth trillions of dollars by the end of the decade. Unfortunately, ten years turned into ten months and by the end of December 2000, the party was over.

"Getting in was easy"

This is Wednesday 2pm: