Macro: Sandcastle economics
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Bubble stocks under pressure; What is status on the EV battle?
Peter Garnry
Chief Investment Strategist
Summary: Bubble stocks and Ark Invest have had a tough year with our bubble stocks basket down 9.8% this year. The sell-off is driven by waning investor sentiment in the most speculative pockets of the market and rising inflation expectations which sooner or later will translate into higher interest rates and thus higher discount rate on future cash flows. This likely path will hit high duration assets such as high growth and bubble stocks. We also take a short look at Volkswagen earnings and their newly published Q1 EV deliveries which is 3x below that of Tesla.
Yesterday, we wrote about how the green transformation theme has suddenly awoke to a new reality of investor doubts and rising inflation expectations potentially pressuring future profitability and growth because higher input costs on commodities directly impact prices on green transformation technology. Vestas made it clear during its Q1 earnings call yesterday that rising commodity prices will mean higher prices on wind turbines.
However, it is not only green transformation stocks that are feeling the heat. Our bubble stocks (companies with aggressive valuations on EV/Sales and negative earnings expectations) basket was down 2.2% yesterday taking year-to-date performance to -9.8% making it the worst performing basket. Investors are essentially getting nervous over equity valuations in a likely rising interest rate environment driven by higher inflation, because for how long can the US 10-year yield stay this low when inflation expectations are running higher?
The bubble stocks are mimicking the ARK Innovation ETF down 11% this year and indicated down again today hitting critical support levels. Bubble stocks have the ultimate duration profile (ultra-long) as their valuations are driven by cash flows far into the future, and since they are mainly equity financed the cost of capital (the discount rate on future cash flows) is driven by the cost of equity component. But with high valuations the implied equity risk premium is low and thus the marginal change in the risk-free rate dominates the marginal change in cost of capital.
Long-term bubble stocks are a bet on exponential technologies as Ark Invest’s founder and CEO Cathie Wood would, but short-term the main risk source is investor sentiment and the risk-free rate. Investors being aggressively are betting on low inflation to set in after the current spike in the inflation rate, and thus short-term the bubble stocks will be mirror image of interest rates. The worst-performing bubble stock this year has been C3.ai hit by insider selling and investors doubting the discounted growth rate.
Saxo's Bubble Stocks equity theme basket
| Name | Domicile | Mkt Cap (USD mn.) | 12M Fwd EPS | 12M Fwd EV/Sales | Diff to PT (%) | 5yr return (%) |
| Kuaishou Technology | China | 213,499 | -0.85 | 16.2 | 36.8 | NA |
| Sea Ltd | Singapore | 140,384 | -1.26 | 17.3 | 24.2 | NA |
| Airbnb Inc | United States | 130,635 | -1.31 | 28.1 | 14.7 | NA |
| NIO Inc | China | 94,795 | -1.59 | 18.0 | 54.2 | NA |
| Snowflake Inc | United States | 84,570 | -0.87 | 71.5 | 34.6 | NA |
| DoorDash Inc | United States | 67,743 | -0.19 | 17.6 | 32.4 | NA |
| Roku Inc | United States | 59,111 | -0.26 | 23.1 | 54.6 | NA |
| Bilibili Inc | China | 51,601 | -4.76 | 18.2 | 48.9 | NA |
| Teladoc Health Inc | United States | 41,124 | -0.30 | 20.3 | 51.7 | 1,346.9 |
| XPeng Inc | China | 37,228 | -2.41 | 15.0 | 83.6 | NA |
| Affirm Holdings Inc | United States | 34,499 | -0.89 | 39.7 | 91.2 | NA |
| BeiGene Ltd | China | 34,490 | -9.78 | 35.8 | 24.8 | 1,063.9 |
| Unity Software Inc | United States | 34,299 | -0.35 | 32.7 | 54.2 | NA |
| Plug Power Inc | United States | 32,156 | -0.18 | 68.1 | 125.0 | 1,165.1 |
| Seagen Inc | United States | 31,016 | -0.11 | 15.9 | 39.0 | 301.9 |
| Cloudflare Inc | United States | 28,050 | -0.08 | 46.1 | 23.6 | NA |
| Splunk Inc | United States | 27,486 | -0.21 | 10.8 | 62.4 | 149.6 |
| MongoDB Inc | United States | 25,201 | -0.98 | 34.1 | 38.6 | NA |
| Exact Sciences Corp | United States | 24,752 | -1.14 | 13.3 | 43.4 | 1,769.1 |
| GSX Techedu Inc | China | 24,455 | -3.34 | 11.8 | NA | NA |
| Farfetch Ltd | United Kingdom | 23,465 | -0.66 | 10.3 | 42.8 | NA |
| DraftKings Inc | United States | 23,186 | -1.16 | 26.5 | 30.2 | NA |
| GDS Holdings Ltd | China | 20,998 | -0.15 | 18.6 | 47.2 | NA |
| 10X Genomics Inc | United States | 20,458 | -0.32 | 38.9 | 13.6 | NA |
| Argenx SE | Netherlands | 19,397 | -10.72 | 105.2 | 18.5 | 1,840.4 |
| Alnylam Pharmaceuticals Inc | United States | 19,214 | -4.77 | 21.0 | 30.1 | 138.8 |
| Ping An Healthcare and Technology Co Ltd | China | 18,942 | -0.91 | 11.6 | 55.0 | NA |
| Innovent Biologics Inc | China | 18,305 | -0.61 | 24.0 | 27.8 | NA |
| Guardant Health Inc | United States | 16,826 | -1.50 | 40.5 | 23.7 | NA |
| Zai Lab Ltd | China | 15,781 | -2.52 | 87.5 | 13.3 | NA |
| Kingsoft Cloud Holdings Ltd | China | 15,710 | -2.56 | 9.6 | 52.0 | NA |
| Yatsen Holding Ltd | China | 15,665 | -1.17 | 10.7 | 90.3 | NA |
| Oak Street Health Inc | United States | 15,461 | -0.46 | 11.1 | 21.1 | NA |
| C3.ai Inc | United States | 15,370 | -0.79 | 69.6 | 130.8 | NA |
| Bill.com Holdings Inc | United States | 15,319 | -0.19 | 57.4 | 25.7 | NA |
| Canopy Growth Corp | Canada | 15,279 | -0.90 | 24.2 | 28.5 | 1,122.7 |
| Appian Corp | United States | 15,229 | -0.40 | 43.3 | 34.3 | NA |
| Avalara Inc | United States | 14,770 | -0.16 | 21.3 | 56.1 | NA |
| Elastic NV | United States | 14,429 | -0.44 | 20.6 | 59.7 | NA |
| Cree Inc | United States | 14,240 | -0.59 | 21.3 | 22.6 | 304.9 |
| Aggregate / median | 1,565,141 | 21.3 | 38.6 | 920.3 |
Source: Bloomberg and Saxo Group
How quickly can Volkswagen catch up to Tesla?
Volkswagen has reported Q1 earnings today with revenue showing a 13% growth y/y but decline from Q4 2020. Cash flow generation and EBITDA margin look good, with Volkswagen generating €22bn in free cash flow over the past 12 months, but this figure will likely come down as the pandemic created a unique cost situation that will not repeat. The key metric for long-term investors was the 59,948 deliveries of EVs with 70% going to the European market. This number is 3x below Tesla’s 184,800 deliveries in Q1 and shows that Volkswagen is still a lot behind and the current chip shortage for carmakers is not making things easier as the CEO Diess told the press.
There is also a report out today from Electrek saying based on internal information from Tesla, that Q2 capacity has already been sold out indicating booming demand for Tesla in Q2. For now, the US carmaker is keeping the competition at bay and still reinforcing the narrative of high growth and that it can conquer the future car industry. However, it is worth noting that a big part of the valuation hinges on self-driving car technology that can turn Tesla’s into a self-driving fleet of cars that can also extract entertainment profits. But Elon Musk recently tweeted between the lines, that self-driving technology is much harder than initially anticipated and the current road network is not optimized or designed for computer vision but human vision.Latest Market Insights
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