[Programming Note: I’ll usually write about topics related to tech and SaaS startups. But with the stock market gyrating so widely, it’s hard to ignore.]
Has the stock market hit a bottom?
I’m not going to try to answer this directly because the best answer is “nobody knows.” But that’s no fun. So, I’ll make three observations.
First, some good companies are trading at valuations that seem quite low. For example, RingCentral, which ended their most recent quarter with 1.9b in ARR and projects 26-28% growth for the year. While not profitable on a GAAP (accrual) basis, they had an operating cash flow margin of ~13% in the most recent quarter. With an enterprise value of ~6.5b, that’s a 3.4x ARR valuation for a high quality SaaS business at scale.1 I don’t track this company on a professional basis, so perhaps I’m missing some nuance as to why it’s loathed by the market. But, wow, it’s hard to see how the fundamentals merit a valuation at this level.
There are plenty of other public SaaS companies with similarly strong fundamentals relative to their current valuation. When quality companies are trading at significant discounts, that’s a sign of a market bottom.
Second, there are plenty of assets that still seem to have fan followings worthy of the Good Times of 2021, ie not indicative a stock market bottom. For example, Cathy Wood. Her flagship ARKK ETF is down 61% this year yet has not seen any net outflows. From a profile from this week in Forbes:
At a valley in the roller coaster, Wood’s investors haven’t jumped off the ride either. The Ark Innovation ETF has seen more than $1 billion in inflows this year, though Ark’s other eight ETFs have had outflows largely offsetting that amount.
This is hard to reconcile with a market bottom. Why? A bottom is typically marked by capitulation, which means that all of the potential sellers have sold. This is typically when active retail investors have left the market. Granted, I’m not a professional stock market analyst - but it seems unlikely to me that the a stock market bottom will arrive without a significant exodus from the major hotspots of retail investor exuberance.
Third, one factor that has likely been providing a boost to the stock market has been housing. Perhaps many of Cathy Wood’s patient investors are soothed by positive wealth effects from the strong housing market. Unfortunately, it seems likely that housing will cool off. In his most recent public comments on the topic, Fed Chairman Powell admitted “homebuyers need a bit of a reset.”
I don’t expect any type of housing crash, but a slowdown in price appreciation would likely remove some of ballast from the stock market. According to my favorite real estate analyst Bill McBride:
The data seems to argue for the slow house price growth scenario, but my view is the most likely scenario is house prices will stall in nominal terms and decline in real terms.
Of course, I’m not citing any sources that aren’t publicly available. Maybe the stock market has already priced in the likely cooling in housing. A few minutes away from hitting the “publish” button, the QQQ is up 1.3%. Let’s grab some popcorn and see what happens next.
A few podcast recommendations from this week:
A review of “The Richest Man Who Ever Lived: The Life and Times of Jacob Fugger” on the Founders podcast. I’m a big fan of business history, so the Founders podcast is one of my favorites. In the early 16th century, Fugger was the most dominant figure in European commerce.2 He was not well-liked - apparently, there is evidence his life provides the etymology for the famous epithet that resembles his last name.
A few weeks old, but I loved Tim Ferris’ interview with Ed Thorp, the great mathematician and investor. Thorp’s hedge fund embodied what is a true “edge” in investing - he figured out how to properly value options years before anyone else. I find it a helpful reminder that the best stock market strategy for mere mortals is buy-and-hold.
A few interesting reads from this week:
This blog post from Eric Newcomer has a good rundown of current sentiment among VCs (scroll down a bit as the first section is about SF politics) - summary: it’s bleak.
Great analysis of Nerdwallet’s SEO strategy.3 Nerdwallet bootstrapped to 8 figures in revenue and brilliantly leveraged SEO. I continue to think that SEO is the most undervalued growth strategy for startups. I suspect the a handful of early stage startups that are investing the most in SEO today will be the startups that are growing with the least need for outside funding tomorrow.
I’m using Yahoo Finance for the enterprise value figure. It might not be 100% accurate in terms of capturing the most up-to-date fully diluted share count & balance sheet figures, but if it’s off it’s only by a few percent.
For Game of Thrones fans, he seems a lot like the Iron Bank of Braavos.
As an SEO enthusiast, I’m always happy to chat SEO - please reach out if you’d like to discuss.
Great stuff, thank you Sandy. I've been heavy Silver for 2 years and I'm usually 2 years early, I've seen recent posts from Jim Rodgers and Peter Lynch recommending it, huge fans of both since the early 80's, nice to see they are both still in the game. Inflation has been brutal, just took a trip down the coast from Portland to SF and paid double or more for most of the places we stayed at compared to 3-5 years ago, though surprisingly SF was fairly affordable Tuesday night.