Overvalued stocks of 2019

Folks,

With all this talk of us being late cycle and what would have been the most laughable IPO ever (WeWork) had it actually been completed, what do you think are the most overvalued companies out there now? If you had one shot to put all your savings into shorting one company, which would it be and why?

To get things rolling, Beyond Meat currently has a market cap of $9b and last year's revenues were

 

Just about anything tech related hemorrhaging money with no clear business plan indicating that being cash-flow positive is remotely possible...

This is clearly the year VCs have perfected the pump & dump; have to give it to them and their investment bankers for being able to consistently package & dump overpriced companies. Undoubtedly retail investors will be stuck holding the bag when the music stops.

I just finished re-reading one of Howard Mark's older books and it's funny how well he nails things, especially re: public markets.

 

Agreed on the many tech companies recently listed - interestingly many of them have suffered share price drops since listing but in a gradual manner as opposed to a sharp correction, suggesting there is still a lot of confidence in them for some reason...

Which book is this? keen to check it out.

 

I'm leery of most tech shorts because today's cash burn doesn't tell me much about the future promise of the product.

To use an example everyone knows: Tesla. I'm not looking to debate Tesla as anyone who follows that shit on twitter knows how incredibly chaotic that debate can get. I'll simply say that I've found the Tesla bear crowd to be unconvincing when I ask what will limit Tesla's market share if they get to the other side of the abyss. They'll give me an answer like competition, but it's always very clear that they're banking 100% on the company not getting to sustainable cash flow and haven't done any work on how bad it could get (for their short position) should the company make it to the other side.

Netflix to me is the most clearly overvalued company I have seen in a long time. To anyone saying "I thought you don't like tech shorts?" my answer is: exactly. It's not a tech company in my view. If someone wants to make the case that it is, I'm all ears.

 

Interesting take on Tesla / Netflix mate. Thing is, what could be a catalyst for the market to get woke (in the words of Kanye West) and correct these crazy valuations?

 

For Netflix I think it will be earnings that stop growing. Content costs keep rising, revenue grows more slowly, and operating income flattens. Analysts get uncomfortable with the multiples implied by the new lower earnings, and downgrade the stock.

Not sure how fast that happens as I'd need to know the full content ramp-up schedule to know that. Not to mention the rate of expansion into new countries. Anyone looking to play a timing game needs infinitely more information in my view. I'm comfortable saying the correction happens eventually whether it takes 2 quarters or 2 years, and that's a good return either way.

 

Teladoc (TDOC) is massively overvalued. They are growing revenue while losing a ton of money, but the real issue is that they have very low utilization for their service - under 5% based on total encounters/total population with access. If people start using the service, they have to pay the doctors more, and they could actually go to negative gross margin based on a deep dive I did, albeit a while back.

On the flip side, if no one uses it, they will eventually lost customers

 
vanillathunder:
Interesting. Do these customers even come back after using the service one?

I’ve never seen them publish those numbers, but there’s probably a reason for that. It’s a pretty bad UX.

 

Hah, I think the bargaining power of doctor is a bigger turn off for me than the UI tbh.

This is not a good two-sided network because customers are extremely loyal to the suppliers of the platform (the doctor), very prone to disintermediation - eg. I like the doctor, I will call him / her going forward directly, instead of using TDOC. And doctors threatening to leave if not being paid nicely could exponentially decrease the network effect / attractiveness of this platform.

Oooof.

 
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vanillathunder:
Hah, I think the bargaining power of doctor is a bigger turn off for me than the UI tbh.

This is not a good two-sided network because customers are extremely loyal to the suppliers of the platform (the doctor), very prone to disintermediation - eg. I like the doctor, I will call him / her going forward directly, instead of using TDOC. And doctors threatening to leave if not being paid nicely could exponentially decrease the network effect / attractiveness of this platform.

Oooof.

Not really how it works though. Doctors use TDOC on an as available basis, sort of like Uber. The doctor doesn't want to create or take the patient relationship as they'd need to then fit another patient into their already packed office schedule. Doctors use it during commutes or when they have no-shows or a slow day. In fact, TDOC has actually stated in court that because they don't want to create a doctor/patient relationship that a patient will never get the same doctor twice.

The doctors sign in and get $35-40/call and then try to crank a few out at a time. It is highly transactional, and the doctors have little bargaining power...because of this model, TDOC also tends to have low quality doctors, who have failed to thrive elsewhere.

 

If you want to short smth on valuation alone you're going to have a baaad time.

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.
 

I've heard that advice a lot, but I mostly disagree with it. I think its biased because someone who lost on a short is motivated to say "I was right on valuation, the market was just too stubborn." That's always a better excuse than saying the valuation was wrong.

I think the truth more often is that the valuation is indeed wrong. Some companies deserve sky high multiples, and understanding why they deserve those high multiples is very difficult. Those companies are usually not only in newer industries but are sometimes even creating industries/markets/categories that didn't even exist before. Very hard to value something like that. You might instead be tempted to just bet against the high multiple (I mean hey, you're diversified and wealthy and have more fun things to do) and call it a day.

Then later on, when the short burns you, claim that you learned a lesson about catalysts. It still sucks, but much more likely to get you a 2nd chance than saying you didn't know how to value the company properly.

 

I doubt people really believe these valuations are real, sustainable and well-deserved. These are not fundamental valuations, but market pricing. The market still has loads of money, so there may be still room for burning some more cash. But eventually reality catches up. Call it reversion to mean, back to fundamentals, distrust, sputtering engine, music stop with musical chairs . Even on that moment it is important to understand where the value of the asset is coming from, fundamental sustainable or just from passing the bag to the next one? Agree on : many business cases bleeding money looking for growth: expensive customer acquisition by subventioning product/service, in the hope to gain enough market to make it. Risky game, better have a bullet proof strategy, tech, product and hope competition is less equipped.

 

Well i never short on valuation, there are far more better reasons to short a company, so i might be biased here. Also market usually tends to overreact/overvalue, so no reason to argue that something is overvalued, it's always overvalued and it will be that way most of the time.

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.
 

Isn't it already widely known there's nothing special about the ride sharing software itself? The advantage of Uber is first-mover in that they're easily the largest ride sharing company brand and have invested the most (compared to peers, idk about google and others) into research on self-driving car tech. By being the largest player and aiming to be the first with the self-driving tech, they'll be the first ride sharing company to achieve scale and profitability. Once that happens it doesn't matter if other ride sharing companies pop up because they'll experience the same money losing problem at the start, and no one will accept that when there's already a comparable and profitable alternative that's dominant across all major geographic markets. Classic race to the top and winner-take-all scenario.

 

Correct. In fact when Uber and Lyft temporarily left Austin in 2017, mom-and-pop ride hailing companies were able to very easily get up and running using similar software. Hell, they might've even licensed it from Uber for all I know.

Its all about getting to scale first so that any smaller player would be forced to offer something a little weaker (a little less pay, a little longer wait time, etc) due to the smaller player's lack of scale.

 

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