Maybe this time is different. Those words, supposedly the most dangerous to utter in the investing realm, came to mind amid the frenzied pops in the highly anticipated initial public offerings of the past week.
They recalled the wild IPOs at the end of the last century, when the public’s enthusiasm for all things dot-com had investors paying crazy prices for new stocks that often lacked earnings, revenue, or, in some cases, actual operations. After the calendar turned over to the year 2000—without the world descending into chaos from the Y2K computer bug, remember that?—the bubble popped, especially after Barron’s published its seminal cash-burn story that March, which showed that the dot-com kids were rapidly running through the liquid assets compliant capital markets had provided to them. As it turned out, the Nasdaq Composite had posted its top tick a bit more than a week earlier, although we only learned that in retrospect.
What is different this time is that the current highflying IPOs are coming from innovative companies that have become major businesses, nurtured by their private-market investors while attracting throngs of fans who wanted to become shareholders as well as customers. So they clamoured for DoorDash (ticker: DASH) and Airbnb (ABNB), sending their shares soaring in their first day of trading by 86% and 113%, respectively, over their respective IPO prices.
So great was the frenzy that there was furious buying of the call options of ABB (ABB), the big European industrial company out of confusion with the ticker for Airbnb, our former Barron’s colleague Mike Santoli amusingly reported on CNBC. That wasn’t the first case of mistaken identity with a hot IPO. Instead of getting in on the 2019 IPO of Zoom Video Communications (ZM), which has become one of this year’s stay-at-home winning stocks, punters mistakenly chased penny stock Zoom Technologies (ZTNO) ahead of the former’s IPO.
What does recall the dot-com bubble era are the valuations accorded these IPOs. In his preview of the Airbnb offering last week, colleague Andrew Bary quoted New York University professor and tech entrepreneur Scott Galloway bullishly predicting a US$100 billion market value—by the end of 2022. At the end of its first day trading on Thursday, its market cap already topped Galloway’s no longer outlandish projection, which was three times what had been estimated just a week earlier.
Another blast from that past is Tesla‘s (TSLA) 50%-plus jump since Standard & Poor’s announced last month the electric-vehicle stock’s inclusion in the S&P 500 index. That recalled the 64% jump in then-dominant internet search company Yahoo! in December 1999 ahead of its addition to the benchmark index, just a few months before the Nasdaq’s peak.
S&P 500 index funds and portfolios that followed the benchmark will have to buy Tesla without regard to the stock’s value, as colleague Evie Liu reports. But the slavish adherence to this particular market gauge belies the tenet of index investing—that the efficient market distills the reasoned assessments of buyers and sellers of the value of a security. “Whether or not [Tesla CEO] Elon Musk will ever deliver autonomous driving, we are drifting closer to autonomous investing,” writes Jim Grant in the current Grant’s Interest Rate Observer.
Even if that’s the case, this episode demonstrates that the S&P 500 doesn’t represent the entirety of the U.S. stock market. For instance, the Vanguard 500 Index fund (VFIAX) has significantly lagged the Vanguard Total Stock Market Index fund (VTSAX), 15.64% to 17.8% in the year through Wednesday, according to Morningstar data. Over the past 12 months, the gap is 17.41% to 19.14%.
For his part, Musk decried the “M.B.A.-isation of America” to The Wall Street Journal this past week for U.S. corporations supposedly focusing too much on financials. Which is ironic given Tesla’s adept financial engineering, including its announcement this past week of a $5 billion sale of stock, its third equity financing this year, for a total $12 billion.
Musk’s criticism seems directed at those skilled at analyzing the EV maker’s income statement and balance sheet, such as Vicki Bryan, who pens the Bond Angle research letter. Tesla’s addition to the S&P 500 followed its reporting of a requisite four consecutive profitable quarters, which can be “traced entirely to energy credit sales plus noncash account and unusual items—none of which are its core business,” she writes.
These items provided a $1.6 billion boost to reported free cash flow of $1.93 billion in the four quarters through Sept. 30, which, however, ignored $100 million for solar-equipment capital expenditures and $1.1 billion in capex funded by leases. Taking all that into consideration, operations actually consumed more than $800 million in cash, she concludes.
The entire $9.18 billion year-over-year increase in reported cash, to $14.53 billion on Sept. 30, resulted from net borrowing of $1.5 billion and the sale of $7.7 billion in stock and equity equivalents, Bryan adds. The ebullient stock market, augmented by the index effect, provides the cheap capital to keep the Musk magic going.
That’s what’s different this time from the dot-com era. There seems to be a seemingly limitless font of money to be tapped by hypergrowth companies that promise to change how we work, live, and get around. The question is whether it will end differently.
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
The latest hike is unlikely to be the last as inflation remains stubbornly high
In a decision that will surprise few economists – or borrowers – the RBA announced a further 0.25 percent rise in interest rates when it met earlier this afternoon. This brings the current interest rate up to 3.35 percent, a 3.25 percent increase since May last year.
Prior to today’s announcement, when the interest rate was still 3.1 percent, research by Roy Morgan released at the end of last month revealed that 23.9 percent of Australian mortgage holders were ‘at risk’ of mortgage stress in the three months to December 2022. Mortgage stress is where one third or more of weekly household income is going towards mortgage repayments.
In a tight rental market, mortgage pressure has also lead more landlords to pass rate rises onto tenants.
Research director at CoreLogic, Tim Lawless, says the latest rate rise moves beyond the ‘serviceability assessments’ some borrowers passed when applying for their loans.
“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate,” he said. “The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.
“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”
Today’s decision signals the RBA’s continued efforts to use the cash rate to manage inflation, which sits at 7.8 percent annually. Time will tell whether it has been successful in curbing spending or whether, as many predict, there are more rate rises on the way. Mr Lawless said overseas economies could offer some hope to borrowers.
“Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending,” he said. “Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022, albeit from the highest level since the mid-1990s (outside of the impact from the introduction of GST in 2000).
“Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35 percent, through to another 75 basis points of hikes. However, a recent survey from Bloomberg puts the median forecast at 3.6 percent, implying one more hike of 25 basis points in the wings.”
Adidas might sell its struggling Reebok brand, potentially taking advantage of the strength of athletic goods, which have been a bright spot in apparel during the Covid-19 crisis. On Monday, Adidas (ticker: ADDYY) said it was reviewing Reebok’s future, which could include a sale. The news comes ahead of the company’s five-year blueprint, which it is …