We are not in a bubble

 
Thematic Thinking Q4 Edition

Gregg Guerin

1st Dec

Key takeaways

  • Fundamental analysis is not one dimensional
  • Déjà vu? Are we seeing a repeat of 1999’s infamous Tech Bubble again?
  • Illustrating the power of being a digital vs physical company

We are not in a bubble!

With returns like that, many investors are asking fear-driven questions and who could blame them, again #2020. A fear-driven question like “Has it gone too high?” can be flipped to “How high can it go?” Just take Cloud Computing as an example. It’s up (30.83%*) ytd, so does that mean it’s due to collapse or does that even come close to pricing in the $1+ Trillion** of revenues these high margin businesses were predicted to receive BEFORE COVID-19? Some are even so leary that they are asking for parallels with 1999’s infamous Tech Bubble. With central banks pumping excess liquidity into markets, has this new money supply artificially inflated the FANG stocks? With those sitting on the outside waiting to buy any potential dip, we bang the drum for a rules-based approach to help remove the dangers of sentiment driven trading, empowering you to act in the face of uncertainty, fear and exuberance.

Here’s a good example: the FANG stocks are valued at more than the FTSE100 Index. But let’s turn that around and raise an crucial question: when was the last time you used the services of a FTSE100 company? Aside from who you bank with? Food for thought.

When asked if we’re in a bubble, we’ll ask, what stock would you say supports an argument that we are in a bubble? Tesla, we’re told, and we’ve all heard of Tesla, but by comparison how many of you have heard of Fastly? Fastly is a cloud platform which delivers faster, safer, and more scalable websites and apps to customers. YTD, both in performance terms and on a chart basis, they appear similar, so if one is in a “bubble,” does that mean the other stock is also?

Fundamental analysis is not one dimensional. We are going to compare Fastly and Tesla. Both are up nearly 400% (YTD - as of 30th September, 2020).

Source: Factset from 31 December 2019 to 30th September 2020

Past performance is not a guarantee of future results.

References to specific companies should not be construed as a recommendation to buy or sell any securities in those companies, nor should they be assumed profitable.

Source: Factset as at 30th September 2020

It’s astonishing based on the stats in the table above how these two stocks can be compared. They are worlds apart.

Now, it’s important to note that we are NOT saying that Tesla IS overvalued and we are NOT saying Fastly IS NOT overvalued. We are simply saying that using fundamental analysis on a chart and taking two high growth names as a gauge for a bubble – can be misleading.

We’ve included their respective business areas for a reason here. Tesla sells a physical product, and now offering $40k cars. But what happens if Tesla receives 100mn orders? How long would it take them to build this many cars? In fact, on November 6th, Peleton’s CEO, John Foley, admitted as much, as they are struggling to keep up with demand (for their physical product), no doubt being driven by both the WFH dynamic and the pandemic. Foley said on Peleton’s earnings call; “sales outpaced our internal estimates quickly causing wait times for Bike+ to balloon.” Brian Sozzi of Yahoo! Finance points out, “Although a high class problem to have, the ‘crush’ in demand — as Foley calls it — held back Peloton’s most recent quarterly earnings and outlook to an extent.”

Now, compare that to the digital. If the new James Bond® movie, “No Time to Die”, launched on Friday, how quickly could 100mn (200mn?) people buy, download and watch it? Instantly! At what quality? Perfect 1080p/4k/8k! This, ladies and gentlemen, emphatically is the difference between digital and physical.

* Cloud Computing represented by the First Trust Cloud Computing UCITS ETF
**https://cloudcomputing-news.net/news/2020/oct/20/covid-19-acceleration-contributes-to-1-trillion-cloud-ecosystem-by-2024-says
Past performance is no guarantee of future results. Please see end of article for full definitions.

You should consider the fund’s investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Global Portfolios at +44 (0)203 195 7121 or visit www.ftglobalportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about the fund. The prospectus or summary prospectus should be read carefully before investing.

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