These 3 Tech-Related Developments Either Make Perfect Sense Or None At All

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Includes: AMD, BRK.A, BRK.B, BYND, DIA, INTC, IWM, IWN, IWO, LYFT, PINS, QQQ, SPY, UBER, ZM
by: The Fortune Teller
Summary

Three things that made me go 'hmmm' over the past week:

Berkshire Hathaway buying shares of Amazon.

The way AMD share price reacted to the company's earnings.

Valuations that investors are willing to assign for recent IPOs.

Hmmm.

Three very different things have caught my attention over the past few days when it comes to the tech sector:

  • Breaking news.
  • Q1/2019 earnings.
  • IPO valuations.

The interesting thing about these three unrelated pieces is that, while some investors think they make perfect sense, others view those as a clear sign that we are at, or near, another tech bubble.

In this article, I wish to touch upon these three pieces and let you decide for yourself if this market looks rational or somewhat disconnected to you.

1. Berkshire Hathaway Buying Amazon

On 5/15/1997, a small company priced its IPO, by selling 3M shares for $16/share.

22 years later, Amazon.com Inc. (AMZN) has a market-cap of $936B, and $10,000 that were invested in its IPO are now worth $1,118,012.50.

Chart Data by YCharts

In an interview Warren Buffett gave CNBC, he revealed that Berkshire Hathaway Inc. (BRK.A, BRK.B) now has a stake in the giant online retailer:

One of the fellows in the office that manage money ... bought some Amazon

Buffett added that he is a fan of Amazon and admitted to be "an idiot for not buying".

I don't know if "idiot" is the right word, but I can't help myself wondering whether this purchase makes him (or BRK for that matter) less or more idiot now than he is/was (or they are/were) beforehand?...

Chart Data by YCharts

On one hand, I fully understand BRK's "if you can't beat 'em, join 'em" approach. On the other hand, the idea of investing is "buy low, sell high", isn't it?...

2. Advanced Micro Devices' Reaction to Earnings

On 4/30, after the market closed, Advanced Micro Devices Inc. (AMD) reported its earnings for Q1/2019. Based on the following two trading days, it seems like investors are undecided yet whether the numbers were good or bad.

Chart Data by YCharts

Allow me to try and give you a helping hand here, by looking at the past year trends. While AMD's revenues and EPS keep sinking, the stock price is rising...

In addition, when you put all the recent talks about AMD gaining market share on the expense of Intel (INTC) in the right perspective, AMD share price makes even less sense.

Source: Cpubenchmark.net

On the other hand, based on its arch rival's valuation, it seems like AMD already took much of INTC market share; at least on a relative market-cap perspective...

Chart Data by YCharts

3. IPO Valuations

The markets are at, or near, all-time highs.

Stocks are enjoying the best start since 1987, with the main indices recording double-digit returns YTD:

  • Invesco QQQ Trust (QQQ) +22.2%
  • iShares Russell 2000 Growth ETF (IWO) +20.2%
  • iShares Russell 2000 ETF (IWM) +18.0%
  • SPDR® S&P 500 ETF (SPY) =17.0%
  • iShares Russell 2000 Value ETF (IWN) +15.5%
  • SPDR® Dow Jones Industrial Average ETF (DIA) +13.4%

Stocks are enjoying the best start since 1987

Technology and growth are leading the way, but is this really (and fully) justified?

Take a closer look at the Y/Y revenue growth of the FAANG gang:

  • Facebook (FB): +26% >>> Slowest in company history!
  • Apple (AAPL): -5% >>> Slowest since Q3/2016
  • Amazon (AMZN): +17% >>> Slowest since Q1/2015
  • Netflix (NFLX): +22% >>> Slowest since Q2/2013
  • Google/Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL): +17% >>> Slowest since Q3/2015

It's no wonder that investors are betting over £1B against a trio of unicorns that were recently IPO-ed: Lyft Inc. (LYFT), Pinterest Inc. (PINS), and Zoom Video Communications Inc. (ZM).

These companies don't make a profit, as of yet, so investors completely rely on their price-to-sales (P/S) ratios. The median P/S ratio of five* of the biggest tech IPOs in 2019 is 17x.

*LYFT, PINS, ZM, Beyond Meat (BYND) that saw its share price climbing 163% in its first trading day (versus the IPO pricing at $25/share), and Uber (UBER), which is set to issue at/close to $50/share.

As a reminder, P/S ratios between 1 and 2 are generally considered good, and ratios of less than 1 are considered excellent. As with all equity valuation metrics, average P/S ratios can vary significantly between industries/sectors. Nonetheless, even if we allow tech stocks to trade at much higher ratios - due to their strong and growing revenue streams - a 17x multiple is way off the chart/norm.

Chart Data by YCharts

As I wrote right at the beginning in this article, I'm not going to draw any conclusion here, rather let each reader makes his/her own mind about it. Having said that, those are certainly things that make me go hmmm....

Disclosure: I am/we are short AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.