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Swaggy's Top Stonks
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Today we'll be looking at the historical P/S valuations for some popular companies before getting into the top trending stocks for the week and the moves behind them.
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Today's Letter
Market Update - Have growth stocks bottomed?
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Top Meme Stocks
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Market Update
After the recent drawdowns of such grandiose nature the big questions around finance forums like Twitter and Reddit seem to revolve around "wen recession?". Notwithstanding, we can't forget that most growth names are already down 80% or more and the days of roaring meme stocks seem to be behind us, at least temporarily, while the market sorts itself out.
I'm testing a new polling feature to see what you all have to think. I'll publish results in the next edition of the newsletter. So, what are your thoughts?
Have growth stocks bottomed? |
Since most growth companies are pre-profit or in some cases even pre-revenue, they haven't historically been valued based on the typical P/E ratios. Rather, they usually obtain their valuations from other metrics such as growth in user acquisition, top-line revenues, operating margin expansion, or in some cases short-interest (the last part was satire).
So where are we now in the cycle that decides whether or not the recession will completely wipe out growth stocks and see most of them go to $0? Or is that even the case. For this example, let's take a look at the historical Price to Sales (P/S) ratios of 3 companies.
One that retail traders seem to love, Palantir (PLTR)
One that retail traders seem to hate, Peloton (PTON)
And a stable mega-cap (and staple) holding up the S&P 500, Apple (AAPL)
Palantir (PLTR) Historical Price-Sales - yCharts
An overlay of the share price will look very similar to this chart, with share price peaking in early 2021 at over $35 per share (intraday high of $45). Revenues are up roughly 60% since 2020, however, based on the P/S metric the stock is trading at nearly the same valuation as when the company became public, back in September of 2020.
Peloton (PTON) Historical Price-Sales - yCharts
As we've covered before, the Peloton story was an interesting one with the company fumbling the bag after experiencing very strong tailwinds from the pandemic. PTON share price is down nearly 95% from last summer's highs ($165 to now $10), and is trading at a historically low P/S valuation of just 0.832. Current P/S is almost 10x lower than when the company first became public.
PTON is actually trading at a valuation less than the revenues it's generating TTM. Usually this would signify extremely low margins, not profitable, or lack of confidence in leadership to turn things around.
Apple (AAPL) Historical Price-Sales - yCharts
One of the pillars of the market, even Apple's P/S ratio has seen a dip. For a company like AAPL, Price-Sales is probably not the best metric for valuation and I would rather look at P/E, revenue growth in their services segment, and margin expansion. However, the P/S in the chart above tells a similar, although less volatile, story that demonstrates a compression in valuation by roughly 25% (in-line with share price).
Final Take
Using the charts above, we can get a visual representation of the dips in valuation we've seen in high-growth names, as well "stable" companies like Apple. In regards to the P/S metric alone, most names are trading below their pre-pandemic levels, so is it time to buy?
That's a difficult question to answer, but to all those saying that growth stocks still have "X" amount to fall, sometimes you need to step outside the box and look at exactly "why" they are trading at the levels that they are. The credit crunch has had it's effect on most of these names and thus a lot of growth stocks went from trading at a P/S of 30x or more, to now a much lesser value.
In a downtrend and bear market there is always room to fall, but valuations for many names have already seen extreme contractions. Will they suffer another 80% drop or could now be a good time to begin dollar-cost-averaging (DCA) into new or existing positions. In my opinion, an 80% decline is generally a good risk-reward for companies you want to hold over the next 5-10 years. As always, it's important to look at the metrics and why they are trading at the levels that they are.
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Top Meme Stocks
Significant movers of the week.
GameStop (GME): GameStop announced company layoffs and a CFO change after the CFO stepped down. They also announced a 4-1 stock split this week. GME shares are up roughly 5% this week.
OIL/CPI: Oil prices going down and all eyes on CPI print next week have these two "tickers" being mentioned quite a bit all over finance-related social platforms.
AMD: Shares of AMD popped in the latter part of the week after Samsung provided guidance that was better than expected. Earnings season is coming up and AMD reports at the end of the month.
Twitter (TWTR): News of Elon stepping out of the Twitter deal has TWTR making headlines. Is it time for a DWAC squeeze with Truth Social's platform leading the way?
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