A Trillion Dollars. So What?

by: Arun Chopra CMT, CFA


This cycle has been characterized by constantly staring at the last crash, and increasingly the 90's bubble.

We are inundated with at best misleading analysis even when there are fair parallels.

It's important to keep perspective during a time of so much noise.

We've all been cautious since the market lows of 09, this is a natural emotion. I like to think of it as managing for the last crisis. But some of what is gets thrown around, especially nowadays, lacks sound reason.

As I was writing a broader piece on misleading technical analysis this cycle, I came across another piece of frustratingly simple analysis, the good old Cisco (NASDAQ:CSCO) chart from 2000 and the first 'Trillion dollar' company. I've covered up the account because that's not my game, but rest assured this caught the attention it was knowingly or unknowingly seeking. The implication here is that because the word 'trillion' or that a market cap could reach a 'trillion' is in play, we are heading for a crash.

Let's deconstruct the above a bit. For those of us were there, you know for one the market was nearly 50% higher than today based off certain measures. In Cisco's case, the market cap was 540B with an annual run rate of just 15B, or in other words nearly 40X's sales.

Today when you look at every company with a market cap over 400B there isn't anything even close. Facebook (NASDAQ:FB) comes near at 14X's and even then we could cut the data up significantly as it shows higher CFO margins, scale, and growth.

In fact not a single big important name has reached that level this cycle in tech. 3D systems (NYSE:DDD), Ambarella (NASDAQ:AMBA), and some of the other momentum names did get to 20X in 2014-205, and the Twitter (NYSE:TWTR), Fire Eye (NASDAQ:FEYE), and SNAPs of the world flirted above the 20X range, but for a very limited time. All of them were rightfully rerated.

Further Cisco suffered a significant decline in sales as the business cycle ended. In what is now part 2 of this 'series' I will focus much closer on interest rates and the differences that full-time bears have missed going on a few years now.

The chart below shows Cisco sales actually rising to 23B at the peak (after the valuation high) and then rolling over to 20B. The irony is the stock ended up at 7.5X sales at the bottom, or what would still be one of the highest valuations on the table above.

The above tweet is emblematic of what we have been seeing for who knows how long at this point.

Having said that yes we are at all time highs on even a median price to sales basis across the entire market, however this is due more to sectors like Staples and Utilities that have definitely left the realm of reality and clearly show the yield chase so reflective on this cycle's reflation push.

The point of this article is just a reminder to keep your head about you in this time of mass confusion, overvaluation (yes) and market momentum. I more recently saw a 45 minute presentation suggesting the market is literally sitting at 1995 with the biggest 'massive rally' to come, something I couldn't disagree with more, but the logic was at least understandable (even if flimsy). You can see my other articles with respect to the big picture and the overall mess I do believe we are in.

And for those who are already bursting to scream about Tesla (NASDAQ:TSLA), or Netflix (NASDAQ:NFLX), or other securities we know are expensive, please refer to "I'm Shocked, SHOCKED, to find Gambling in this Establishment" for better context on some of my overall views.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.