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  1. Home
  2. / Investing

We're Getting Too Far Over Our Skis

Unfortunately, I envision a very big fall coming to many of the names that have run triple-digits over the past month or so.
By TIMOTHY COLLINS
Dec 22, 2020 | 02:09 PM EST
Stocks quotes in this article: QS, FUBO, ROKU, NFLX, DIS, DKNG

I'm not creative enough for this market. That's not to say I'm not creative. I am. I wrote a fiction novel. That's 100% creativity. Granted, I'm not saying it's good, but it does require creativity. Still, there's no dark fantasy or horror I could create compared to what I see coming down the line given the creative metrics we're using to value companies these days.

Fortunately, we're better than the eyeball metrics of 2000, but right now anything to do with streaming or electric vehicles is pricing in the total addressable market for years to come for essentially every company involved. Therein lies the rub, every company can't have a complete market share. We know a few companies will tend to dominate certain markets with additional players to be seen.

That being said, the market is a forward-pricing mechanism. That's where the creativity comes into play. The total addressable markets are being given an unknown quotient. I dare not care it infinite, but the world is full of possibilities, so company X could also expand into business segments Y and Z, thus, it needs an even greater multiple.

I've used QuantumScape (QS) as an example. The company now carries an enterprise value near $50 billion. Management, at the time of the merger, provided a 2028 FUTURE enterprise value of $32 billion to $58 billion based on 5x to 9x revenue. It then declared a discounted enterprise value of $12.5 billion. By that logic we are now 4x what the company itself believed the current EV. I have seen bulls discuss how there are other applications for the technology.

Backing into this, the current valuation puts the future enterprise value at $200 billion which is now closer to 30x estimated 2028 revenue. This also puts them above the median valuation benchmark they highlighted in their investor presentation that showed them to be initially highly discounted. They are also right on the median for the EV/EBITDA that once showed them as well below their peers and median.

It's not only about QS. I know I'm guilty of picking on them. The run in fuboTV (FUBO) has gone from great to slightly aggressive to somewhat insane. The gambling potential is great but it's not necessarily unique. The streaming aspect is niche but doesn't carry the strong financials like we see with Roku (ROKU) or original content like we see with Netflix (NFLX) or Disney (DIS) .

Needham did upgrade shares today with a price target of $60 - we're basically there now - and bumped 2021 revenue estimates by 5% and 2022 by a whopping 3%. Yes, gambling will help, but this is a pure short squeeze combined with the current FOMO (fear of missing out) market. Needham calls this an "inexpensive" way to get involved in a skinny bundle plus gambling. A month ago, it was an inexpensive way, but now you're flat out chasing.

That being said, the market is now justifying this huge run with the huge market that is gambling and streaming. On the streaming side, clear winners have emerged. Niche companies will get niche shares. A niche share doesn't support this kind of run. In terms of gambling, again, I see it as niche. FUBO is going to sit way behind DraftKings (DKNG) , Barstool, and FanDuel. We haven't been able to see them execute on this either. Again, it offered a great risk versus reward in the teens and twenties but not at $57.

Names like these have become impossible to short because the market is forward-pricing on an undefined level. Unfortunately, I envision a very big fall coming to many of the names that have run triple-digits over the past month or so. When I say big, I see a 25% to 35% swift down move happening over just a few day days in many of the recent SPACs with big moves and names like FUBO and QS. It may take until January 2021, but we're getting too far over our skis at this point.

(Disney is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS? Learn more now.

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At the time of publication, Timothy Collins was Long FUBO put butterfly, QS put butterfly.

TAGS: Investing | Markets | Stocks | Trading

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