New ATHs, No Shorts, SNAP PINS PTON Earnings, 3,855
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Well the supply and demand wasn’t right for new highs Wednesday but it sure was yesterday. It wasn’t a blow off top type of day, just a relentless move higher with the S&P +1.09% to 3,872, the NASDAQ +1.23% to 13,778 and the Russell +1.98% to 2,202. NYSE + NASDAQ volume was average at ~12.1 billion shares. NYSE + NASDAQ Advancers outweighed decliners 5,199 to 1,905 and 539 securities out of 7,291 traded made new highs (7.29%).
I pointed out yesterday morning that from Mon through Wednesday the VIX had it’s biggest three day drop ever signaling “NO FEAR”. Well Sentimentrader came out with another data point showing the same thing: Median short interest % on stocks in the S&P, DJIA, NASDAQ-100 and Russell 2000 has fallen to 17 year lows: the shorts are abandoning ship as the market moves relentlessly higher leaving one less source of buying should the market slip up (Chart Source: Sentimentrader Blog, “Shorts have left the market”, February 4).
Next, there were a number of important earnings reports yesterday afternoon (Snapchat (SNAP), Pinterest (PINS) and Peloton (PTON)) that I want to review. One thing that these stocks have in common is that they are very early in their growth cycles so traditional valuation metrics like the Price to Earnings ratio don’t apply. That’s because they’re trying to maximize growth not profitability at this stage. All the profits in a discounted cash flow model would be in the out years. One measure that better captures valuation is Price to Sales.
Let’s start with SNAP which had a market cap of $87 billion at Thursday’s close – though it was down 7.44% when the after hours closed yesterday at 5pm PST. Daily Active Users (DAUs) were +22% to 265 million and Average Revenue Per User (ARPU) was +33% to $3.55 leading to a 62% increase in Revenue. They earned 9 cents/shares Non-GAAP Diluted.
Clearly, SNAP is not focused on profitability at the moment, for the reasons I just listed, so let’s take a look at their Price to Sales ratio. At Thursday’s close, to give it credit for the net cash on its balance sheet, SNAP had an Enterprise Value (EV) of $85.7 billion and 2020 sales were $2.5 billion for an EV to Sales ratio of 34x. I never pay 34x earnings for a stock so I could never touch SNAP – though I like to invest in more mature companies while there are those who successfully invest in these earlier stage growth companies. Nevertheless, 34x sales is far from cheap.
Moving on to Pinterest (PINS) with a market cap of $54 billion at Thursday’s close – though it finished the after hours +9.76%. Global Monthly Active Users (GMAUs) were +37% to 459 million, Revenue was +76% and they earned 43 cents EPS Non-GAAP Diluted.
PINS enterprise value as of Thursday’s close was $51.9 billion and 2020 sales were $1.7 billion for a EV to Sales ratio of 31x. Again when we’re getting to this level of valuation, world domination is essentially priced in.
Finally, let’s turn to Peloton (PTON) which had a $55 billion market cap at Thursday’s close – though it finished the after hours down 8.02%. Sales were +128% and they earned 18 cents/share Diluted EPS.
PTON’s EV at Thursday’s close was $52.7 billion and 2020 sales were $3 billion for a EV to Sales ratio of 18x. Again, this is quite the valuation.
Last, I want to mention the level I think we should keep an eye on today and that’s 3,855 – the old ATH on the S&P from Monday 1/25. The bulls are going to want to see a further push higher or at least consolidation above that level. A breakdown below that level would suggest a false breakout – that there really isn’t sustained demand for stocks at these prices – at least right now. If that were to occur, it would be a piece of evidence in favor of the bears. As of 1am PST, with England and Germany flat in their first hour of trading, France up about 3/4 of a percent and our futures marginally higher, the presumption is that today will be another victory for the bulls.