This week, the WCLD cloud index had a strong week, moving up 9% to $28.78. After last week’s baby step towards “risk-on,” this week the market took a big leap as the NASDAQ was up 5% and speculative plays like Tesla were up 31%.
It’s important to note that the current move up in stock market prices is driven by multiple expansion, not earnings growth. That’s despite the fact that there’s a strong chance of a soft economy this year, which will translate into slowed growth for the average company.
What’s going on?
The goldilocks scenario: the economy not too hot (which would drive up inflation) and not too cold (which would cause a nasty recession). In other words, the growing possibility of a “soft landing” of the economy where inflation cools without a recession.
Is the inflation boogeyman truly on its way out? See the chart below, bars on the right - inflation is clearly be trending down.
Meanwhile, economic growth in Q4 was reported at 2.9% - far from a recession.
What about Q1? Housing has been hit hard by rising rates and is supposed to be a continued area of weakness. But mortgage purchase applications are up the past two weeks.
While mortgages might be at a low level in absolute terms, when it comes to a recession it’s the trend that matters. The trend here is positive. At least, it doesn’t seem consistent with the negative trends typical in a recession.
Perhaps the housing market is starting to recover?
Another key economic indicator is the health of the consumer. A useful metric is real income (ie controlled for inflation) excluding government payments (because government payments are not volatile, so removing them highlights the underlying trend). In the chart below, bars on the right…the trend actually looks pretty good.
If inflation is cooling off while economic growth is far from negative, that means the Fed can likely start cutting rates much sooner than it’s been suggesting. It also means that the Fed (and many analysts) have been fundamentally wrong in their assessment of the economy and inflation in the past few months.
What we can see by January’s “risk-on” move is that the market thinks the Fed has been too pessimistic about inflation and economic growth. Could the market be wrong? Absolutely - there is still significant risk that we are witnessing a “false dawn.”
That said, a positive January has given me a little more comfort in predicting that we will end this year on more stable economic footing than we started.
Podcast Recommendation of the Week:
20VC had a great interview with Cliff Obrecht, Co-Founder of Canva. He recounts the remarkable story of how he and his co-founder (and wife!) Melanie Perkins went from modest upbringings in Perth, Australia, to running one of the best software companies on the planet. One of my favorite tactical insights from Canva is how they’ve been able to develop many of their top leaders through internal promotions - which goes against the conventional wisdom in SaaS hiring that every executive must have a requisite set of experiences. It’s also incredibly impressive that they have donated 99% of their Canva shares to their foundation. Canva is a wonderful embodiment of a mission-driven company.
Podcast Recommendation of the Week #2:
There was another fantastic podcast this past week, Tim Ferriss’ interview of one of the legends of VC, Benchmark’s Bill Gurley. The interview is loaded with provocative insights. A few that were notable were the story of Uber massively expanding their TAM (which was thought by many to be capped at the taxi market) as well as the highly effective, egalitarian approach that has defined Benchmark’s success. Interestingly, Gurley admits to calling for a crash in tech 6 years to early (in 2016) - I truly appreciate his willingness to learn from mistakes. A good role model for us all! He also recommends one of my favorite books of the past few years, Range - check it out if you haven’t already!
Reading Recommendation of the Week:
This has been a tough week for Stripe. As a frequent media darling, it’s been assumed to be one of the healthiest private startups. However, Bloomberg broke news this week suggesting trouble:
Stripe Inc., one of the world’s most valuable startups, has hired JPMorgan Chase & Co. and Goldman Sachs Group Inc. as it explores options for raising liquidity.
In the past, Stripe has had no problem finding eager investors. What happened?
Their stats don’t look good. The Information reports that it was cash flow negative last year while only growing ~20%:
The company’s gross revenue…was $14.4 billion last year, a person familiar with the matter said. For comparison, Forbes had reported that the company generated nearly $12 billion in gross revenue in 2021, up 60% from a year earlier…Stripe’s net revenue couldn’t be learned, but investors say it amounts to 15% to 20% of gross revenue…Meanwhile, Stripe executives have told employees the company last year burned through meaningful amounts of cash for the first time.
According to the WSJ, Stripe has recently tried to raise a new round:
Stripe has approached investors about raising at least $2 billion in fresh cash at a valuation of $55 billion to $60 billion
Yikes. If Stripe were public today with those numbers, I don’t think it would be worth $30b. That’s trouble. Let’s say Stripe’s revenue - which, as a payments processor, is its net revenue - is run-rating ~$3b and is growing 20-25%. Let’s give it credit for cutting costs, so perhaps it’s breakeven. That still puts it well below the bar of the Rule of 40.
Before its recent bounce, the WCLD cloud index was down more than 70% from its highs. Investors could easily demand that that level of discount from Stripe’s previous $95b valuation.