As the Nasdaq once more flirts with new highs, the tech swoon seen in February and March suddenly feels like a distant memory.
Just ask Tesla (TSLA) and Twitter (TWTR) , both of which have seen their shares rise sharply from their early-spring lows even though a lot of the concerns raised by critics when shares were at much lower levels haven't exactly been put to rest.
A tech stock rebound isn't in and of itself anything for investors to be worried about. The February/March selloff hammered cheap and expensive companies alike, and was arguably driven by a mixture of excessive trade/regulatory fears and a hunger among some of those possessing large paper gains to take profits. Quite a few quality tech companies that have bounced since March still trade at pretty reasonable valuations.
But pockets of frothiness do exist, particularly among enterprise software and consumer Internet high-flyers. For example, while it's hard to criticize Netflix's (NFLX) subscriber growth, competitive positioning or general execution, justifying its current $157 billion valuation requires making some pretty aggressive assumptions about both future growth and profitability. And while I felt eSignature leader DocuSign's (DOCU) financials and growth profile would yield a strong IPO, its valuation (equal to 14 times this fiscal year's expected billings) following a strong debut and subsequent run-up leaves little room for error.
However, more than the run-ups in quality names possessing few or no major business red flags, the big gains being delivered by companies whose stories aren't so clean is a sign that there's some irrational exuberance afoot.
Tesla is a good case in point. The EV maker's shares are now up around 40% from their early-April low, after selling off hard in March amid worries about Model 3 production, future profitability and a fatal Model X crash being probed by the NHTSA. And though Tesla's shares slipped a bit in afternoon trading on Tuesday after the company announced it's laying off 9% of its workforce, they still closed up 3.2%, after rising earlier in the day on an upbeat note from KeyBanc Capital.
Tesla, now worth a hefty $57 billion, has seen some encouraging news and reports about Model 3 production since Elon Musk assumed direct oversight of the effort in early spring. Shares got a boost last week after Musk said Tesla is now making 3,500 Model 3 units per week and that it's "quite likely" it will reach a 5,000-vehicle-per-week rate by the end of June, thus making good on an earlier target. And Tesla has also gotten a lift from its promise that it will be profitable and cash-flow positive in Q3 and Q4, thereby sparing itself the need to raise additional capital.
However, as the layoffs show, Tesla's push to avoid a fresh capital raise is coming at a price. Though it had a backlog of 450,000-plus Model 3 net reservations to fulfill at the end of Q1, the company now only says it wants to reach a 10,000-unit-per-week Model 3 production rate "in a capital-efficient manner," rather than as quickly as possible, and suggested in May production of its Model Y crossover won't start for another 24 months or so.
Moreover, Tesla hasn't exactly put to rest worries about the Model 3's margin profile. The company reported its Model 3 gross margin (GM) was slightly negative in Q1, only expects it to be near breakeven in Q2 and -- though volume production of the $35,000 Standard version of the Model now isn't set to start until Q1 2019 -- is only aiming for its Model 3 GM to be "close to 20%" by year's end. That compares with a prior goal of reaching a 25% GM after Model 3 production "stabilizes" around 5,000 units per week.
Likewise, Twitter's shares have been on a tear -- they're up over 50% from their early-April lows, and 81% in 2018 -- even though long-standing concerns about user growth haven't been put to rest. While better ad product and sales execution has boosted revenue growth, Twitter's monthly active users (MAUs) rose a paltry 2% annually in Q1 to 336 million, with MAUs in the U.S. (responsible for over half of Twitter's revenue) dropping slightly to 69 million.
For comparison, Facebook's (FB) MAUs were up 13% in Q1 to 2.2 billion. Due to the company's product missteps and perhaps also the nature of its core services, Twitter doesn't seem to have cracked the code for appealing to a broader base of consumers today any more than it had when its stock was in the teens. Yet the stock now trades for around 11 times its consensus 2018 revenue estimate.
Fitbit (FIT) might be another example of a tech company whose shares have shot higher even though it has some major business concerns to address. The fitness band/smartwatch maker's shares rose about 20% between Monday and Tuesday following a bullish Citron Research report. Citron deemed Fitbit "one of the most underappreciated med-tech stories in the market," and speculated Google or some other firm will buy it.
Citron makes an interesting point or two, and admittedly, I suggested in May 2017 that Fitbit (then trading below $5.50) could be a good contrarian play. However, this is a company that -- due to a mixture of competitive pressures, a limited addressable market and other issues -- has been losing money in recent years and which is expected to see its sales drop 9% in 2018, after having dropped over 25% in 2017. While it's understandable that Fitbit would pop in response to Citron's report, a 20% gain suggests investors are suddenly eager to believe the best about the company.
And when one also takes into account the run-ups seen by the likes of Tesla and Twitter, a case can be that some irrational exuberance exists in parts (though not all) of the tech investing landscape.