Some valuations are absurd – I am going 10% short

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by noodlesource

Microsoft was a great company in 1999. It posted record revenues of $20bn, record net income of $8bn, and soared to a market cap of $615bn.

With that being said, if you had invested in Microsoft at the top of the dot com bubble you would not have seen a return on your investment until 2016.

I believe we are now in the midst of a similar timeline. Some valuations are through the roof without any grounding in reality. It is hard to know when it will correct but I am convinced that at some point investors will once again begin valuing companies as the value of their future free cash flows + a risk premium.

For this reason I am adapting my personal investment strategy from 100% long to 110% long and -10% short with some select picks.

I will be diversifying my shorts and limiting their initial notional value, wary of irrationality continuing. I expect this to be an investment strategy I can stick to for at least 1 year.

I’d love to hear any contrarian views to my thesis and any thoughts on my short picks or suggestions.


My picks (each will be -1% of my portfolio):

1. TSLA Not much needed to be said. Great company, love their products and direction. $800bn valuation is ludicrous.

2. SHOP $180bn valuation for $2.5bn revenue in 2020. 70% growth rate is great but where is my risk premium for my investment today?

3. UBER $113bn valuation with a -$22bn accumulated deficit. Gave up on self driving (their roadmap to profitability?) back in December. Propped up by SoftBank.

4. ZM $126bn valuation with $2bn TTM revenue and $400m net income. Guys, this is a company who offer video communication software. 0 MOAT or risk premium.

5. SNOW $85bn market cap, $489m TTM revenue and -$400m net income. For a data cloud service (hello have you heard of AWS/Azure/etc.?)

6. DASH $65bn market cap, $2bn revenue, -$200m net income. Financials aren’t the most atrocious on this list but food delivery services (like ride sharing) are too location specific. No roadmap to global domination here.

7. LMND $10bn market cap for a “tech” insurance company with less than $100m revenue, -$100m net income. Their S-1 is filled with talk about their AI. Their “chatbot AI” on their website is a web form with a photo of a woman. Seriously?


Picks I am less bearish on but still considering going short.

8. ABNB $128bn market cap, $5bn revenue pre-covid. This one is hard for me. I like this company and think they have potential as a global business. Also a great pick post-covid. But I think $128bn is still too insane. Could be convinced otherwise.

9. NIO $94bn for the Chinese Tesla. Close to bankruptcy pre-2020 EV hype. Now has some momentum but $94bn worth? China growth can be scary though…

10. SPCE $13bn valuation. Richard Branson’s pet project run rampant with a Chamath SPAC. Space, very cool. Return on investment is where sorry?

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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