How to Value Technology Stocks?

Dear Reader,


Technology stocks have been notoriously difficult to value as the 2000-2001 dot com boom clearly showed.

In 2000 and 2001 technology stocks, which had no revenue, let alone profits were worth billions. After that their value just evaporated - they were worth  0(zero) USD. Pets.com and others are a good example. Yahoo's main business lost circa 90% of its value since 2000. But the dot com bubble gave the world companies like Amazon.com Inc.

Now some analysts also say we are in the late stages of a technology bubble. "This time is different". The technology companies have revenues, most Wall Street analysts say. Is it?

Let's have a look. High-growth, exciting technology stocks like Google Inc.(now Alphabet) and Facebook went public at a Market Capitalization to Revenue(Price/Sales) ratio of around 20. I am using Price/Sales ratio for comparison, since many of the exciting technology companies of today barely eke out profits.

After companies like Facebook and Alphabet mature they trade at price to sales ratios of around 7, reflecting their lower growth prospects due mainly to the size effect, since they cannot subsume the global economy. They can enter different industries, however, but that is another matter.

Now, this year there is  a huge line up of technology companies preparing to go public - Lyft, Uber, Pinterest, Palantir, Air BNB. Since these companies stayed much longer private they are quite bigger and the money raised could surpass the money raised in the late stages of the dot com bubble.

The companies above seem again about to be valued at Price/Sales of 20. Are they overvalued? Basically, yes. If the companies above do not turn out to be the next Facebook, Apple, Amazon or Google the will not grow into these lofty valuations. Many of the about to be listed technology unicorns(technology companies valued at more than 1 bln. USD) are still unprofitable after a decade of existence. Wall Street analysts will say - look at Amazon. But Amazon was growing at 20% + a year. And finally they make a profit. I still think Amazon is worth about 2/3 of its current market capitalization of 801.43 billion USD.

In short, I think several of the most hyped technology unicorn companies of today will not be around in 20 years. Just like in the 2000-2001 dot com boom and subsequent bust. If these moonshot companies do not land on the moon, which most of them will not, they will loose 90% to 100% of their value in five  to seven years. Just look at Zynga, GoPro,GroupOn etc. Yes, I do think we are in the late stages of a technology bubble, which will soon burst.

But some excellent technology companies will survive. As the boss of the largest fashion goods company LVMH said: "I know champagne is forever. I am not so sure about Facebook".

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich

What is Amazon's Intrinsic Worth? Growth Slowdown. Amazon Web Services. AWS.

Dear Reader,


Amazon has long been described as a growth stock. Recently, however, its growth slowed down, mainly in its main electronic commerce business.

Amazon executives have  implied the sowdown of growth in the e-commerce business should be disregarded. Should it?

Amazon Web Services(AWS), the cloud computing business of Amazon is growing strongly with around 25.7 bln. USD yearly revenue run rate. The electronic commerce business exhibited a marked growth slowdown. I think this is logical. It is unlikely that all commerce would become internet commerce. Going into a store, checking out things in a physical way and being advised by staff has its value. Shopping for groceries is hardly ever going to go online. Amazon is quickly becoming the number three player in internet advertising breaking up Google and Facebook's duopoly in internet advertising.

Amazon, however, still exhibits very low margins - 4% and this is even considered high by historical standards. Amazon is trading at a trailing Price/Earnings ratio of 78. In my opinion, this is too high even measured by the recent growth of Amazon. Now, that Amazon's revenue is not growing so fast this is stratospheric. Amazon should be trading at a Price/Earnings Ratio of 40, which would imply Amazon's intrinsic worth is around 400 bln. USD or half its current market capitalization of 780 bln. USD.

Why is Amazon's intrinsic worth half its current market capitalization? Because, in short, its revenue growth slowed down from 40% to 20% on a year on year quarterly basis. This means the path to a reasonable net profit margin of let's say 10% gets extended indefintely. Amazon does not distribute dividends. Wall street equity research analysts have long said that with the growth the net profit margin will improve and Amazon will start distributing dividends and shareholders will benefit. But that has not happened for a decade now.

When will Amazon reach its intrinsic worth, which is around 800 USD, or half its current stock price of 1588.22 USD. When the next economic downturn comes, which I forecast will be in 2021, Amazon market capitalization will be cut in half to around to 400 bln. USD from its current 780.14 billion market capitalization.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich

When is the Next Huge Stock Market Fall Coming?

Dear Reader,


US stocks and also global stocks bounced up after 24 December 2018. I think DJIA, S&P 500 and Nasdaq Composite will get close to their previous peaks. The process will go ahead in 2019 and 2020.

In 2021 a large stock market fall will come, according to my humble opinion. The fall will be much greater than the 19.8% recent fall of the S&P 500 which started in the third quarter of 2018. I think the US stock and global markets will crash by around 35-50% starting in 2021.

Why? Because the global financial and monetary system will have too much leverage by then, i.e. too much debt! Even now their is excessive debt burden in the leveraged loans and energy sector markets. What will cause the crash? I think it will be like the butterfly effect in chaos theory. There will be some smaller and some larger triggers like in 2007-2008 -> BNP Paribas Credit Funds, Bear Stearns, Lehman Brothers, Merryll Lynch, AIG etc.

There will be simply too much leverage(debt) in the system. Just look at China - the total debt to GDP of China is above 250%. And China's economy along with USA, Mexico, Indonesia, Nigeria and Turkey has been the main driver of global GDP growth in recent years.

What will the next crisis look like? I think the fall in global GDP will be flatter, but more prolonged than  that of the Great Recession in 2008. Basically it would be like through a milder version of the Great Depression that started in October 1929 and lasted through 1939. This time around, however, the fall in global GDP will last 4-7 years.

Who will benefit from the coming crash? The countries with low debt - Central and Eastern Europe should benefit in the long run, because global firms will look to cut costs. Other countires with low total debt to GDP should also benefit. China could suffer immensely in the next global recession, but it will still remain the second largest economy in the world and will emerge stronger after the economic difficulties it is going to encounter, if my forecast comes true.

Here is the place where my humble person must praise the The Federal Reserve Board of Governors in Washington DC, the Central Bank of the United States. Only the Federal Reserve was brave enough to start decreasing the money base, that is to shrink its balance sheet. The Federal Reserve was brave enough to raise the Federal Funds Rate numerous time. And when the hext crisis comes, only the Federal Reserve will have enough means and ammunition to fight the next downturn of the ecomomic cycle.

I must say, that the strategy of my guru Warren Buffett to stay always invested in the stock market will not work in the coming stock amrket fall. Actually, he never lived through a real Economic Depression. Just to inform people that SOFIX, the main stock market index of the Bulgarian Stock Exchange has recovered only to around 40% of its previous 2007 peak. And Bulgarian GDP has long recovered and surpassed its previous peak. Yes I know, the stock of Berkshire Hathaway fell four times more than 40%, but it relatively quickly recovered.

When the leading global central banks start printing money en masse again, gold, oil and other commodities should turn out to be a good investment and the related stocks, or at least they will not fall as much as the overall stock market indices. High dividiend yield stocks should also fall less in the coming crash. The likes of retailers like Walmart and pharmaceutical companies should provide some form of the proverbial margin of safety.         

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich