Markets seem reasonably priced, until there's not enough money to afford the stocks that make it up. That's the difficult and somewhat brutal lesson we are learning in the wake of Wednesday's shocking Snowflake (SNOW) deal where buyers were indifferent to ho how much they paid.
That indifference led to the utter absurdity of a stock being valued at more than 100 times sales. Not earnings. There are none. Sales. Just losses. Could be losses as far as the eye can see because the company is a hyper-growth enterprise, where it's worth it for CEO Frank Slootman to spend as much as necessary to be the leader in cloud data management and analysis.
Snowflake isn't the issue, though. Frank Slootman will deliver the best he can for shareholders, and I understand why someone would want to buy the stock. This is why I suggested that $125 seemed like a darned good level.
I was off by half.
All day, I heard that the underwriters were the issue, they priced the deal too low. Again, I disagree. They priced the deal at the highest level that could be justified. I arrived at my $120 valuation when the stock was looking $75-$80. How did I get it? I looked at what was the most expensive stock in the market, Zoom (ZM) , and said that it is worthy of that valuation. Believe me, that's a big stretch, as Zoom is growing faster than Snowflake, it may have every bit as big a moat as Snowflake and is outrageously profitable. So what were the underwriters supposed to do? Price the stock at an absurd level to the No. 1 growth company in this market when it is unproven and has a fraction of the revenues? Could they have flooded the market with more stock to keep the price down?
Again they offered 28 million shares. That's not small change. I have no idea why the bankers should be singled out for not offering enough stock. Believe me, as someone who has priced deals and had one priced for me, I think that the number of shares and the price were both well within the realm.
No, the problem was with the buyers. They lost their minds. Now some of this could be the desire to get what's known as a full position in. Lets say they do a huge amount of commission business and they put in for 10% of the deal -- the overreach that indicates you will take as much as they will give you. If you got 50,000 shares at $120, where it prices, you might be tempted to buy another 50,000 say, at as much as $180, giving you a basis of $140 slightly above Zoom, but still pretty ludicrous. But you would be up big on the position at the end of the day.
But there were so many market buyers, perhaps because of the imprimatur of Slootman, so successful at ServiceNow (NOW) , or because two companies, Berkshire Hathaway (BRK.B) (BRK.A) and Salesforce.com (CRM) both got stock on the offering price. Mark Benioff, the CEO of Salesforce, knows pretty much everyone in the tech world and is good friends with so many. He got stock on the Zoom deal from CEO Eric Yuan, and Slootman allowed him to buy $250 million for Salesforce Ventures at the $120 offering price. Far more amazing, was the Buffett's purchase, plus an additional $320 million Snowflake purchased from another unnamed shareholder. Buffett has historically pooh-poohed IPOs; it has been more than 50 years since he's been in one.
Institutions wanted this stock so badly that they sold all of the cloud stocks and many FANG stocks. The destruction of the stocks that were valued at more than 20-times sales, and there are 25 of them that are actively traded. They were almost all under assault and it led to vicious selling in the Nasdaq, where they almost all dwell.
I can understand why you may think that this is aberrant. I told you Wednesday, though, and reiterate Thursday, that Snowflake will be just the first of many, none of which will be as good as Snowflake. What happens after this is a flurry, if not a torrent or flash flood, of deals that will require more selling not just of the stocks selling at 20-times sales, but then you will begin to cut into the tech stocks with much lower valuations like Facebook (FB) , Apple (AAPL) and Alphabet (GOOGL) . These are fantastic companies, but their stocks are simply sources of funds when we get the Snowflakes.
Sometimes I think I am the only one worried about it. But Thursday I got a piece of research entitled "The Implications of IPO a Go Go," and it echoed my thoughts exactly. It talked about how there is going to be a record number of IPOs, that they will be underpriced and go to gigantic premiums and they will ultimately overrun the buyers. The digital stocks, those based on the internet, could be the worst offenders. Wow, I said, I am not alone.
And then I looked at the date: the piece was written on Nov. 30 1999 by my friend Steve Galbraith, the equity strategist, and Bernstein. The top was building and Galbraith was screaming for you to look out. He followed up with two pieces: "Jailbreak the Coming Flood of Expiring IPO Lock-ups" on March 14 2000 --almost the exact top -- and then "Jailbreak Redux No parole for Prior Good Behavior," from April 3, 2000, when the Nasdaq was struggling mightily to hold its ground before the damn broke.
Then, like now, not only were there too many underwritings and then tons of secondaries -- where many insiders sold stock and they were price insensitive sellers who knew their stocks were worth far less than they were selling for, if not worthless entirely.
I was running money back then, and Galbraith's pieces were instrumental in getting me out of the market at the top and then going short in April. He was and is one of the smartest minds in the business.
Now, before I say history will repeat itself, you need to know some mitigating factors. First, the companies coming public are excellent. Their stocks are simply too expensive. Second, there can always be a reformation, where the buyers stop being so nutty or so stupid. Third, there's so little money around to buy all of these deals that the pipeline might be cut short far earlier than many expect. Finally, the Fed is keeping rates low, while we might have stimulus: not the time to dump shares.
But what I did see happen today was a movement to inexpensive stocks historically, stocks like Dow Chemical (DOW) , which raised earnings estimates, or Caterpillar (CAT) , which may be at the cusp of a turn or 3M (MMM) , where the fundamentals are running.
If you think my takeaway is to tell you to get out now, you would be entirely wrong. I expected a correction and I am getting one. But I am putting some of my trust's ultra-large cash position, built by weeks of selling tech, back into the market. We are buying non-tech stocks that have come down with tech that aren't that expensive historically. It feels good to do so.
So, I say we don't want a redux of 1999-2000, where the Nasdaq went from 5,000 to 1,000 in a heartbeat after a huge run. We aren't nearly as undisciplined as we were then, and the merchandise is far better. But you know what? We said that in 1998 and 1999, before the insanity was unleashed, except we didn't think it was insane until after we looked back and realized we were deranged to pay such prices.