Are we headed for inflation, or not?
Is a recession on the horizon, or not?
Are interest rates going up or down?
What in the world is going on with tariffs, and will they crater the market?
I could make the argument for and against all of the above. But the cognitive dissonance in the market is thinking one thing is true for one segment of the market while another thing is true for another.
Either stock valuations are crazy or they're cheap. It’s not likely both.
Spotify Is a Safe-Haven?
I wrote the $Spotify Technology S.A.(SPOT)$ Spotlight article on March 31, 2023, when Spotify was at its low. You can see that operations have recovered tremendously since then, but the stock has also gotten much more expensive. Price to sales multiple expansion — NOT revenue growth — has accounted for a vast majority of the 424% jump in the stock.
Today, shares are trading for 110 times earnings, and the market is pricing in continued growth and margin expansion because…everything is awesome!?!
Coinbase: It’s Different This Time?
$Coinbase Global, Inc.(COIN)$ has also made improvements to operations over the past two years. But the price-to-sales multiple has also doubled, and the stock trades for 32.5x cash flow and 47x earnings.
In a volatile crypto market, this is a stock that could collapse in another crypto winter, but the market doesn’t see that ahead.
NOTE: If Coinbase stock does collapse, I’ll be happy to buy more.
Robinhood
Furthest into potential bubble territory is $Robinhood(HOOD)$ , which trades for about 20x sales and 42x earnings right now. I love Robinhood’s business trajectory and don’t plan on selling the stock, but to say it’s priced for perfection may be an understatement.
My point isn’t to scare you out of any of these stocks. I’ve been buying all three in the past year.
But valuation does matter, and when you look at these stocks, we see a corner of the market that’s priced as if economic growth will continue for the foreseeable future.
I’m happy with my cost basis of $23.65, and I don’t regret buying for $41.85 in April, but at today’s close of $73.45, the stock is incredibly expensive.
In these stocks, the market thinks the only direction is up. Elsewhere, an economic slowdown is being priced in.
The End Is Near
Not every stock is trading for a nosebleed valuation, even if they’re doing everything right.
In this corner of the market, investors think growth will stall because of some combination of consumers pulling back, a potential recession, or other risks like tariffs and interest rates.
And in a lot of ways, I sympathize with the bearish sentiment and have been writing about risks for weeks.
Uneasy consumers are something we hear about regularly on conference calls, so a little caution is warranted. But the level of value in these stocks seems crazy when compared to the optimism priced into the stocks I showed above.
Is General Motors In Trouble?
Take $General Motors(GM)$ as an example. The company has great margins, isn’t discounting vehicles as much as competitors, is taking share in EVs as $Tesla Motors(TSLA)$ is losing share, and even has a coherent autonomy strategy.
But the stock is in the dumpster.
Shares are trading for just 5× 2025 earnings guidance (even after the impact of tariffs), and the company has nothing more to do with its cash than buy back stock, which it’s done at about a 20% per year clip for the last two years.
If everything is fine with the economy, people will keep buying cars.
If people keep buying cars, GM will be a home run stock…eventually.
Crocs Goes Out of Style?
I sold GM stock last year, so I don’t have exposure to that value, but I do own shares of $Crocs(CROX)$ in the Asymmetric Portfolio.
The company is still dealing with a decline at HEYDUDE, but Crocs is growing, and this is now a cash flow machine. Management has been reducing debt and buying back stock at a rapid rate, and at 6.4x earnings, why not?
I’m not arguing that Crocs should trade for 74x earnings like $On Holding AG(ONON)$ does, but it probably deserves a higher multiple than it trades for today, as long as the economy doesn’t collapse. And even if there is a downturn, who is putting off a purchase of $40 Crocs?
In the meantime, management will continue to use cash to buy back stock, which eventually will help shareholders.
MGM & Underestimating Gaming
No matter how you look at $MGM Resorts International(MGM)$ ’ stock, it looks undervalued if the economy doesn’t go in the tank.
The enterprise value to EBITDA (a proxy for cash flow from a resort) is just 10.2x, and that implies negative value from the online gaming business.
Management has gone so far as to lay out why it thinks the valuation is insane, given the sum of the parts.
But their only recourse against a skeptical market is to buy back stock. So, they’ve done so at a clip of about 15% of shares per year.
In the most recent conference call, management said they hoped to end buybacks, but with a stock this cheap, it’s the best use of capital.
If Las Vegas collapses in the next 12 months, MGM could see cash flow dry up.
But if the economy is fine, as the valuations above imply, then this stock should be a steal.
Dislocations in the Market
There are always dislocations and points of opportunity in the market. But this market seems especially strange because of the rapid rise in high beta stocks (volatile stocks like Robinhood and $Palantir Technologies Inc.(PLTR)$ ) while value stocks are trading like an economic collapse is near.
Either the economy is fine, and the value stocks will eventually catch up…
OR the economy isn’t fine, and the highly valued stocks will fall back to earth.
Either way, I’m ready to pounce on opportunities wherever they are.
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