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Take Cover - Wall Street Is Breaking Out The Bubblies

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

Let’s see. Google’s record market cap gain on Friday was actually a squeaker. At $66.9 billion it easily passed in one day the entire $50 billion market cap of Caterpillar’s global heavy machinery and engine franchise built up over a century. But only by a hair did it best Cisco’s $66.0 billion gain on April 17, 2000.

But perish the thought that Friday’s fireworks had any resemblance to the shooting star act of Cisco and hundreds of other tech high-flyers 15 years ago or the epic bloodbath that commenced shortly thereafter.

Then again, something was going on with the GOOG beyond the fundamentals. Notwithstanding that Google is one of the most fantastic value creating enterprises on the planet, there was nothing in Friday’s earnings report for Q2 that warranted a 16% re-rating of its market cap.

Indeed, the $345 million or 9.6% gain in net income from the prior quarter was not much of a talisman. Fully 75% of the gain was accounted for by a lower tax rate (from 22.1% to 20.7%) and a cutback of what had been ballooning G&A expenses (from 8.8% of sales to 8.2%). Aside from these benefits at the margins of what is a $70 billion sales machine, net income grew at an unremarkable 2.9% over prior quarter and 7.4% over prior year.

Yet Friday’s re-rating was considerable on a valuation basis. GOOG is entering corporate middle age as it presses upon the law of large numbers, and even with the Q2 uplift its financials clearly show its age. During the three and one-half years since CY 2011, Google’s growth rate for both sales and net income has slowed to 15% per annum.

Consequently, it is hard to see why its LTM net income of $15.1 billion was re-rated from 26X to 31X in less than two hours’ trading. That’s especially the case because 90% of GOOG’s revenues are from advertising, and even the digital ad portion of that space is slowing and getting saturated by GOOG’s preponderant market share.

To wit, the global market for digital advertising outside of China (which lies unavailable behind red-coded firewalls) is projected at $140 billion for 2015. This means that GOOG’s projected digital ad sales of $65 billion this year will compute to a 46% worldwide market share.

Moreover, digital ads already account for 35% of the total worldwide ex-China advertising spend. So the easy digital share gains have been had and no one—–not even the madcap money printers running the central banks—-has eliminated either the business cycle or the cyclicality of ad spending.

Stated differently, GOOG is hurtling fast toward single-digit growth land.  It has not invented a new product that’s on a 100X or 1000X market penetration ramp. Instead, its captured an impressive share of the old-line advertising spend that amounts to $190 billion in the US and $500 billion worldwide ex-China, and which will head south as it always does during the very next recession.

Its probably even worse. GOOG’s estimated 2015 advertising revenues of $65 billion compares to about $44 billion in 2012 before the tech sector was ignited by a tsunami of VC funding and soaring pre-IPO valuations. So some considerable portion of that $21 billion revenue gain may well represent burn-rate money from start-up customers that most definitely will not be around after the next day of reckoning in Silicon Valley.

Never mind. When all else fails, there is nothing like a spree of PE multiple re-ratings to keep the Wall Street party going a few additional months.

But don’t call them re-ratings. After all, this time is different because nothing which happened during the last two Wall Street crashes is remotely relevant to today’s awesome outlook. For example, here’s a real yucker from Morgan Stanley’s ultra-bullish chief US equity strategist, Adam Parker. Unlike during the last tech-wreck, he avers, we are dealing with real companies with substantial sales and earnings, not dotcom eyeball candy:

Today’s tech companies bear little resemblance to the makeshift operations that quickly burned through cash more than a decade ago, says Adam Parker, Morgan Stanley & Co.’s Chief US Equity Strategist. In 1999, fewer than half of tech companies were profitable. With some notable exceptions, around 90% of tech firms now have positive operating margins.

Undoubtedly, Mr. Parker was still guzzling beer in his dorm room during the last tech crash, but that doesn’t excuse his abysmal ignorance of the historical facts. In the Great Deformation I tracked the fate of the dozen big cap tech companies before and after the dotcom crash. These included Cisco, Dell, Intel, Microsoft, Lucent Technologies, Juniper Networks, Hewlett-Packard, Nortel, WorldCom and Global Crossing—–with General Electric and AIG thrown in for spice.

Needless to say, these weren’t “makeshift operations”. Among them they had posted in excess of $300 billion in sales and $50 billion in net income at the turn of the century.

But here’s what happened. During the time between Greenspan’s infamous “irrational exuberance” speech in December 1996 and the March 2000 dotcom peak, the aggregate market cap of these dozen high flyers soared from $600 billion to $3.8 trillion. Notwithstanding respectable rates of sales and earnings growth, operating performance of these big cap tech giants did not remotely justify a 6X gain in market cap during this 39 month period.

For once Greenspan had been right. It was irrational exuberance on steroids——a proposition validated in spades by subsequent events. To wit, during the next 18 months a stunning $2.7 trillion of this market cap vanished and never returned. In fact, by 2012 four of these companies had disappeared and the market cap of those which remained was just $850 billion or 22% of the peak level.

But here’s the stunner. The market value gain of this dozen highflyers between Greenspan’s irrational exuberance mutterings and the end of 2012 amounted to the grand sum of 2.5% per annum.

So beware of the re-rating game. It works in both directions, and violently so when it goes into reverse. And in any event, young Mr. Parker should flunk freshman economics for missing the $3 trillion elephant in the room. Makeshift operations, indeed.

Nor did history put a crimp in the re-ratings game this time around. On Friday, Wall Street sounded just like February 2000:

And at least five brokerages — J.P. Morgan, Bernstein Research, Nomura Research, Jefferies and Evercore — think Google’s stock will can and will go still higher. After Google reported a sharp rise in earnings and sales that trumped Wall Street’s expectations, they all raised their 12-month targets on the company’s stock Friday morning to $800. At that price, Google’s market cap would catapult above the half-trillion-dollar mark to $547 billion, making Google only the second company, along with Apple AAPL, +0.86% to be valued above the half-trillion-dollar threshold. Apple is currently trading at a $740 billion valuation.

Indeed, the Cisco story alone is dispositive. At the time of its $66 billion one-day surge, Cisco was posting about $15 billion of net sales and $2.5 billion of net income. Not at all makeshift.
CSCO Market Cap Chart

CSCO Market Cap data by YCharts

Needless to say, that didn’t stop its $555 billion peak market cap from being ionized during the tech wreck. By October 2002, $475 billion or 85% of that total had disappeared, and 15 years later Cisco’s market cap is still only 25% of its once and glorious top.

Yet this is not because CSCO slide down the tubes as an operating company in the interim. In fact, its current $49 billion of LTM sales are triple its year 2000 level and net income of $9 billion is nearly 4X higher than it was then.

In short, even as Cisco did become “all things digital” and a dominant behemoth in its server, router and internet equipment space, it got “re-rated” downward with a vengeance as it became clear that it was not Jack’s financial beanstalk after all. That is, its results kept on growing, but just not to the sky.
CSCO Net Income (TTM) Chart

CSCO Net Income (TTM) data by YCharts

In the Cisco case, the downward rerating after the dotcom crash was considerable, to say the least. At the time of the April 2000 crash it was trading a 220X LTM reported earnings. That compares to 13X today.

And that gets to the real truth about the Wall Street bubblies which were flowing last Friday. Morgan Stanley’s chief equity strategist, like the rest of the sell-side stock peddlers, has it exactly upside down; and the proof of the pudding in this instance lies is in Morgan Stanley’s own “New Tech” index of 16 high flyers of the present era.

This charmed circle includes Google, Amazon, Baidu, Facebook, Saleforce.com, Netflix, Pandora, Tesla, LinkedIn, ServiceNow, Splunk, Workday, Ylep, Priceline, QLIK Technologies and Yandex. Taken altogether, their market cap clocked in at $1.3 trillion on Friday. That compares to just $21 billion of LTM net income for the entire index combined.

The talking heads, of course, would urge not to be troubled. After all, what’s a 61X trailing PE among today’s leading tech growth companies?

As it happens, quite a bit. When you take GOOG’s middle-aged profits machine out of the mix, you get something altogether more frisky. Namely, a collective market cap of $840 billion for the other 15 names in the Morgan Stanley index and LTM net income of exactly $6.0 billion.

As we said at the top—-let’s see. That’s a PE multiple of 140X. That’s February 2000 all over again.

Take cover. The Wall Street bubblies are back!

 

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Tue, 07/21/2015 - 12:21 | 6337402 The Delicate Genius
The Delicate Genius's picture

Spotify is so much better than Pandora.

Tue, 07/21/2015 - 12:48 | 6337407 TalkToLind
TalkToLind's picture

Bubbles, schmubbles -- just buy MOAR Apple stawks, bitchez; the iCar will make you rich! And it is absolutely brilliant:

  • The iCar interior and exterior look and feel (including wheels) will be based on skeuomorphic design featuring wooden, leather and green felt textures with rounded corners.
  • Your windscreen will break for no reason. Do not panic when this happens, you have insurance.
  • The battery is hidden and cannot be replaced or repaired.
  • The iCar dashboard will feature an attractive Swiss Railways analog clock! Rufen sie ihren anwalt.
  • You cannot connect the iCar directly to an electrical outlet; you must use iCharge hardware/software to convert electricity into an energy type that is compatible.
  • U2's latest album will come pre-loaded in the iCar's media player; you are not allowed to remove this album.
  • The iCar may run over and injure innocent pedestrians. Do not panic when this happens, you have insurance.
  • Operating system updates may brick your iCar. Do not panic when this happens, you have insurance.

 
Warning: Do not make the mistake of calling people who sell iCars "sales people", they are Incredibly Intelligent Savants.

Tue, 07/21/2015 - 12:23 | 6337408 youngman
youngman's picture

Facebook just passed GE in value.....this is so stupid its hard to believe...really stupid...we are so dumb...we really are

Tue, 07/21/2015 - 12:38 | 6337481 pods
pods's picture

I "like" this.

It seriously is a clown show. But, these companies (facebook) do have people's attention.  And a LOT of it.  I see zombies everywhere, stuck to their phones waiting for that next little dopamine fix to come on the screen.

pods

Tue, 07/21/2015 - 12:56 | 6337571 RaceToTheBottom
RaceToTheBottom's picture

Facebook should be renamed Catbook because that is all it is used to display.

Tue, 07/21/2015 - 12:23 | 6337410 ted41776
ted41776's picture

Fuck wall street

Tue, 07/21/2015 - 12:49 | 6337534 disabledvet
disabledvet's picture

Yeah pretty much.

"There's always another trillion where that came from" of course just sign here and you'll all better and such!"

Stocks in a bubble? Wow...really?

Hope you had a good ride then!

Tue, 07/21/2015 - 12:23 | 6337411 Temporalist
Temporalist's picture

I still don't know anyone that uses priceline.

Tue, 07/21/2015 - 13:55 | 6337861 CClarity
CClarity's picture

But you probably know lots of people who use booking.com and priceline owns that.

Tue, 07/21/2015 - 14:20 | 6337997 Headbanger
Headbanger's picture

I don't know anyone.

Solves that problem.

Tue, 07/21/2015 - 12:26 | 6337422 KnuckleDragger-X
KnuckleDragger-X's picture

Tech (including biotech) is the magic fairy dust that'll create rainbows forever, except it won't. A lot of big money in advertising is doing serious rethinking of their strategies due to the massive gaming happening now. When you add in the pullback from companies at the edge, Google is going to lose a small herd of cash cows. Add in the BS in the tech market in general and the S&P is going to lose their shiny pretty quickly this fall.....

Tue, 07/21/2015 - 12:30 | 6337434 Klemens
Klemens's picture

Sales Numbers of german printed Propaganda - Main-Stream-Media is fallen like a stone:

http://www.mmnews.de/index.php/politik/49702-mainstream-dramatischer-abs...

the Sales Numbers of MSM Media is going down since more than 10 years, but now the speed of Sales Numbers going down is now increasing.

 

 

Tue, 07/21/2015 - 12:32 | 6337444 Oh regional Indian
Oh regional Indian's picture

The GOOG will not die, it will morph-eus....

Relax, relax, relax...it's just another pin-prick...

Googlill neutralize your brain, 

Cut you off your feet again....

There is no gain you are preceding...

The distant hills have no mountain vieeeeewwwsssss......

And Iiiiiiiiii   iiiiiiiii ii, have become, 

Comfortably dumb.....

Tue, 07/21/2015 - 12:36 | 6337470 booboo
booboo's picture

All online ads do is piss me off

Tue, 07/21/2015 - 14:26 | 6338042 Terp
Terp's picture

What are online ads?

 

Seriously, I haven´t seen one in many years. Why do companies pay for those again?

Tue, 07/21/2015 - 12:38 | 6337475 BoPeople
BoPeople's picture

How many of them have direct links to the NSA? These are the same ones that receive seemingly ridiculous amounts of unwarranted advertising income. I wonder if there is a connection ... lol.

The fraud used to prop these companies up and pump money to insiders (pre and post IPO) bothers me a bit. It stinks... but what associated with the banks and NSA does not stink?

Tue, 07/21/2015 - 14:27 | 6338045 Terp
Terp's picture

You may be onto something there...  o_o

Tue, 07/21/2015 - 12:41 | 6337500 Quinvarius
Quinvarius's picture

Looking at the index charts today, they look like shit.  They look like gold and slver charts when the bankers are aggressing on them.  When it goes steady down...then flat and not allowed to bounce...  They put some fake support in under the market just so they can break it later for a plunge.  Stocks look ugly here.

Tue, 07/21/2015 - 12:45 | 6337512 Clesthenes
Clesthenes's picture

“After all, what’s a 61x trailing PE among today’s leading tech growth companies?”

Indeed, ‘What financial shock do Judeo-Bolsheviks plan?  Do they plan to inflate the dollar to zero… push stocks to PE ratios of 300, then slam them to a ratio of single digits or even minus numbers… repudiate the federal debt… replace Federal Reserve bank notes with Treasury bank notes…?’

More, what about those street gangs and drug cartels; the government’s – and China’s – role in arming, protecting and forming alliances with such gangs and cartels… and a dozen or so other items.

And, how do China’s ghost cities fit into this unprecedented operation?

And, when will they pull the plug?

Don’t believe me?  Let me walk you thru their maze (based on data collected from federal government and Federal Reserve publications), Part one and Part two.

Tue, 07/21/2015 - 12:46 | 6337518 buzzy_the_pirate_dog
buzzy_the_pirate_dog's picture

Call me stupid, but I like Stockman.

Tue, 07/21/2015 - 13:07 | 6337577 RaceToTheBottom
RaceToTheBottom's picture

Ok, Stupid, I like Stockman as well.

I know his history, but he is a straightshooter.

Tue, 07/21/2015 - 13:16 | 6337656 TheRideNeverEnds
TheRideNeverEnds's picture

Notify me when that index goes 666X.

Till then, BTFD.

Tue, 07/21/2015 - 13:22 | 6337693 Jack Burton
Jack Burton's picture

their market cap clocked in at $1.3 trillion on Friday. That compares to just $21 billion of LTM net income for the entire index combined.

Jesus H. Christ!  There is a bubble looking for a pin. As to San Francisco real estate, these crazy stock prices are one driver of the bubble in that city.

Tue, 07/21/2015 - 13:36 | 6337723 nakki
nakki's picture

I often wonder where all this advertising revenue comes from. It really doesn't make much sense to me. I've bought many things online. I think one time it was through a click ad (mother's day flowers). 

20+ years of going online and out of the thousands and thousands of ads I've seen one time did I buy something. Not sure if I'm the exception or the norm?

Tue, 07/21/2015 - 14:27 | 6338049 Clowns on Acid
Clowns on Acid's picture

Its the norm, but STFU and BTFD. Geez, people like you make it bad for everyone , dude. Stop being so hateful and racist.

Thanks.

Your Friend

Mark Z.

Tue, 07/21/2015 - 13:51 | 6337833 Clowns on Acid
Clowns on Acid's picture

It's called "liquidity + dream". The stocks mentioned have super float (liquidity), this enabling all the money managers (armed with $ 3Trillion of Fed printed fairy dust), to buy / sell the stocks and still make it seem like they are adding value to their firms and customers.

The "dream" is that these internet stocks theoretcially have a possible customer audience of 8 billion.  We all know this is utter bullshiite, however when one is getting paid (money managers) to believe the bullshiite, and one also has the fairy dust to sprinkle on the idea, well what can wrong?

 

Tue, 07/21/2015 - 13:59 | 6337874 sagitarius
sagitarius's picture

google should do, what the banks ahve  introduced:

-stop to pay any dividends on the share and require from every shareholder2% tax for keeping the google stock.

Tue, 07/21/2015 - 13:59 | 6337882 Make_Mine_A_Double
Make_Mine_A_Double's picture

These 'tech' stocks are a reflective allusion held up against the mirror of another reflective allusion.

At least Google/NSA has solid earnings and long term potential (but not at those PE's).

However:

FaceFuck - I don't know anyone who uses it unless they are in 3rd world shitholes with unreliable internet - like say Sri Lanka, Cambodia or France.

NetFlix - I have never used it and know a few chicks that do. You telling me this can't replicated cheaper. And who but the unemployed sits around for 48 hours watching some gay assed A&E show over and over. I don't even have a TVee for Christ's sake.

Apple - okay I bought the Iphone 6 and it's nice and all. However, it is reaching the bounds of utility and pretty soon Chi and Dotheads will be making something just as good and unbranded for a 10th of the price.

 

 

 

 

Tue, 07/21/2015 - 14:20 | 6337995 mpath
mpath's picture

We are in a bubble-that is for sure. But when it will pop is the more important question. Just know when the markets are going to reverse and trade the moves. I have made a small fortune following the "stock market shrink" as he has predicted almost EVERY turn-weeks in advance. 

 

See for yourself--

Tue, 07/21/2015 - 15:15 | 6338261 plata pura
plata pura's picture

Its all figured in.

Tue, 07/21/2015 - 21:05 | 6339690 teutonicate
teutonicate's picture

The Nasdaq 100 is a nice diversified bag of shit to short.

Shorting the basket is a more diversified way to participate on the downside than shorting each individual turd.

Do NOT follow this link or you will be banned from the site!