Bubble Land

Together with 800° GO

The end of the tech bubble is incoming. Nasdaq is down 21% year-to-date. The famed Ark Innovation ETF is down 50%. Valuation multiples are collapsing for any company that doesn’t generate a meaningful amount of free cash flow.

Most high flying tech stocks are down 70-90% from their all time highs:

• TSLA: -27%

• ZM: -83%

• ROKU: -81%

• TDOC: -80%

• COIN: -64%

• SQ: -64%

• EXAS: -61%

• U: -63%

• TWLO: -73%

• CRSP: -74%

• PATH: -78%

• SPOT: -70%

• NTLA: -71%

• SHOP: -74%

• BEAM: -69%

• PD: -47%

• FATE: -71%

• DKNG: -80%

• HOOD: -86%

• SGFY: -61%

Despite the fallout and total implosion of these once high flying tech stocks, cash flow and earnings multiples still remain at nosebleed levels. As an example, Tesla is trading at a P/E ratio of 117x. Shopify has a 129x EV/EBITDA. Block Inc. has a EV/EBITDA of 173x!

These valuation levels imply that investors (“speculators”) are betting high growth continues for years to come. Tech valuations are built on ultrahigh growth rates and hopes and dreams. It is a pile in mentality where everyone bids up equity prices on hopes they can dump it at a higher price in the future.

Here is the question that I propose to all investors new to the game. What would you rather buy:

Company A

• $57 billion market cap

• $5 billion cash, $5 billion debt for $57 billion enterprise value

• $17.5 billion revenue

• $333 million EBITDA

• $166 million net income

Company B

• $67 million market cap

• $57 million cash, $3 million debt for a $13 million enterprise value

• $135 million revenue

• $13 million EBITDA

• $10 million net income

The answer to this question should be easy for anyone who has been closely following my newsletter. With Company A you are betting on hopes, dreams and the future that endless growth will eventually catch up to the sky high valuation.

With Company B, you make all of your money back in one year and are protected by a massive cash balance should earnings in the future disappoint. The margin of safety is large here and should be attractive to any investor who is interested in owning actual businesses, not hopes and dreams.

The goal of all investors is to buy low and sell high. Every talking head on CNBC spews this. Every FinTwit account jokes about it. Every hedge fund manager attempts it. But few actually practice the art of buying low and selling high.

My sense is that most individuals don’t know what buying low and selling high really means. Most investors focus on the stock chart when attempting to buy low and sell high. But stock charts are not really what buying low and selling high really means.

Buying low means buying a company for as cheap of a valuation that you can get. My goal with every stock I purchase is to buy it for significantly under its intrinsic value. I calculate intrinsic value differently with every company but in the end I tend to look for situations where:

• Hard assets (buildings, land and equipment) are worth more than the enterprise value

• The company is trading under its cash and working capital (hard to find in a bull market)

• Hidden assets (growing segments that are spitting off cash flow and revenues hidden by a legacy depleting asset)

Sometimes there are other intrinsic value calculations that I attempt but these are the three key ones that I look for. When I find a great stock idea I then try to buy it meaningfully below the intrinsic value (25-50%) below what I think fair value is.

I don’t rely on growth. I don’t forecast a new technology development. And I don’t buy on hopes and dreams. I buy undervalued assets that Mr. Market does not want to own.

P.S. I will be writing up Company 2 for Alpha Letter Pro Subscribers over the next coming weeks. Stay tuned. This stock is ultra cheap for only trading at 1x EBITDA and it is growing as well!

Time’s (Almost) Up! Invest In This $233B Industry Disruptor Today

The global pizza market is expected to reach $233 billion by 2023. You have until TOMORROW NIGHT to get a slice of the pie.

People want good food delivered fast. That’s why 800° GO has designed a fully-autonomous pizzeria to cook artisanal pies in just 3 minutes. 

Investors have plenty more reason to jump aboard…

• Each pizza pod is 40 square feet, fitting easily in a variety of high-traffic areas.

• 800° GO systems are $200,000 cheaper to build than your traditional pizzeria. 

• Real estate and labor savings can ultimately raise vendor margins by up to 2x.

It’s a high-growth business model with a massive cost-cutting advantage and they’re already launching in markets across the globe. 

Invest before the round closes tomorrow night at midnight PST! 

Updates

Over the past couple weeks I have written up two new investment ideas. The first one is a fallen angel. The equity value of the stock a few years ago was over $2.5 billion. Today it is just under $100 million. There is a significant amount of debt and industry headwinds which will prove challenging to navigate through. But if the company is able to survive this one could be a big winner. Yesterday they announced an asset sale and one time cash refund for over $100 million. The stock was up 20% yesterday and I expect additional asset sales in the future. Please see the research report here.

The second investment is a derivative on the hopeful sale of an oil and gas investment I have been a long-term holder of. The derivative is illiquid, unknown and trades off the beaten path. If my thesis is right on the value of the underlying, there is clear upside of over 100%. If the oil and gas market tanks, this one could be worth zero as it is a derivative and now and ownership in a common stock. That being said, the maturity is long-dated and there are tailwinds in the energy industry combined with a potential asset sale that make this a good bet. Please see the research report here.

Headliners

• Citigroup said to cause flash crash in European stocks on Monday (Seeking Alpha)

• Italy unveils new stimulus plan as economic outlook darkens (Reuters)

• After five record crops, heat wave threatens India's wheat output, export plans (Reuters)

• 10-year Treasury yield hits 3%, first time since 2018, ahead of Fed meeting (Seeking Alpha)

• Analysts see ongoing chip strength in March data despite some seasonal slowness (Seeking Alpha)

• Warren Buffett says he took a $600M bite of Apple stock in 2022's first quarter (Seeking Alpha)

• Morgan Stanley issues list of 45 highest conviction stock picks (Seeking Alpha)

Oil and Gas

• UK asks North Sea oil and gas sector to set out plan to reinvest profits (Reuters)

• Kwarteng and Sunak at odds over windfall tax on oil and gas profits (The Guardian)

• Oil Rose Amid Surging Refined Products Markets (Bloomberg)

• USA Adds More Rigs (Rigzone)

• 890MM North Sea Barrels Could be Sanctioned in 2023 (Rigzone)

• Chevron to Ramp Up Production at Biggest USA Oil Field (Bloomberg)

• Long-term U.S. LNG deals pick up as demand increases (Reuters)

Memes

Dallas Liam @prisoninvestor1

I've owned and operated private prisons for over two decades. Private prisons are the single greatest real estate investment vehicle around. Here is what I have learned. 👇👇👇

John W. Rich (Fake Tech Exec) @Cokedupoptions

Learning a lot from the Berkshire meeting this year. Great stuff.

Not Jerome Powell @alifarhat79

My money was losing 8.5% a year due to inflation so I decided to invest it in the stock market. Now I’ve lost 85% in one week

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