Snowflake IPO
One of the biggest stories on Wednesday was the Snowflake IPO which spiked beyond the wildest imaginations. This IPO was like feeding meat to an alligator because of its industry, growth rate, net retention rate, and successful CEO. The stock peaked at $319 even though the IPO price was only $120. That’s nearly a triple.
Their market cap peaked at $88.4 billion which is a price to sales ratio of 219. It only had sales of $403 million in the past year. The stock closed at $253.93 which is a 111.61% gain. This sized gain for this large of a company is unprecedented.
Some criticize the IPO process for not allowing companies to raise even more money. They are missing out on the fact that this is an outright mania. The company should be happy that it can lose money and still be valued this highly.
Implied expectations when the share price is at $200 are 25% sales growth for the next 15 years and 45% terminal EBIT margins even though this isn’t a profitable company. Its stock is priced at 38 times sales at $200 which is almost unheard of. This was the 8th IPO of more than $1 billion that doubled on its first day of trading since 1998.
As you can see from the chart below, the number of IPOs this year that have doubled in the first day is the 3rd highest in 40 years. Number of IPOs this year is nowhere close to that of the late 1990s. However, the increased supply coming from Snowflake and others dilute the capital that can go to software stocks. This bubble is near its end.
Bad Day For Tech
Unlike Tuesday, Wednesday was bad for tech, especially the big cap firms. S&P 500 fell 0.46% and the Nasdaq fell 1.25%. Interestingly, the Nasdaq 100 has moved more than 1% in 10 of 11 days this month. Most stocks rose as the Russell 2000 was up 0.92%. Some think the Fed was too hawkish since stocks fell after the Fed decision.
Fed was about as dovish as it can get. This bubble in tech stocks is near its end. Apple stock fell 2.95%. It released its new iPads and Apple Watches on Wednesday and the new version of iOS. Frankly, this event was irrelevant for the stock.
The company hasn’t changed much in the past year which is a problem because the stock has more than doubled since then. New iPhones will be fine for consumers, but not for investors. This company doesn’t have any more growth left in the tank. It’s down 16.4% from its record high. It was down before the Fed announcement and fell slightly more afterwards.
Tesla stock finally ended its winning streak by falling 1.8%. Now is the time to short Teslas we are just a few days away from Battery Day. Hype already peaked. It's doubtful that the company can deliver on the promises euphoric speculators have. Somehow, despite being investigated by the DOJ and the SEC, Nikola stock was up 1.4% on the day.
Hottest stocks in the market, which many also the most bearish on, are the online gambling stocks. They are strong shorts. Thesis is that they are spending too much on customer acquisition. It’s very easy for a gambler to have 3 gaming apps on his phone which means there will be no economic profit for the collective industry.
It’s just a matter of time before retail traders get hurt in these names. Investors are the most bearish on Draftkings and Penn National Gaming which were up 5.9% and down 0.6% on the day. Penn is launching its gambling app in Pennsylvania on Friday which is a great ‘sell the news’ event.
ExxonMobil Actually Rallies
Shockingly, ExxonMobil actually went up on Wednesday, ending its 11 day losing streak. It rose 4.3%. It was a great day for the most hated large cap firms as GE stock rose 10.7% and Wells Fargo rose 3.3%. Small cap value stocks were up 1.1% as they are nearing their double top set in June and August.
Regional bank index was up 1.1% and the cloud index was down 0.5%. The CLOU index is down 12.4% from its record high. It might never reach that high again. That sounds grim, but stocks like Zoom and Shopify probably will never reach their summer peaks. Zoom is 10.8% off its record and Shopify is down 22%.
As you can see from the chart below, the gap between the best and the worst sectors in the S&P 500 is almost the highest ever. It was slightly larger in 2000. Obviously, we know tech is the best sector and energy is the worst this year.
Sentiment Update
Sentiment likely peaked in late August/early September. People are not looking for bullish sentiment to justify being bearish, just for the trend to roll over. They won’t become bullish until Tesla falls over 50% and we get extreme fear in the tech stocks.
Microsoft might need to fall 30%. CNN fear and greed index fell 3 points to 56 which is still greed. NAAIM exposure index comes out tomorrow. It will show exposure increased after it had one its largest declines ever last week.
As you can see from the chart below, the AAII weekly advisory sentiment report shows bulls fell from 59% to 54.8% and the percentage of bears rose from 16.2% to 18%. Sentiment is starting to roll over from a euphoric moment which is very bearish.
A correction earlier this month was nothing compared to what is about to come in the next few weeks. AAII individual investor survey showed there were more bears than bulls as the record was extended. These investors missed a lot of the run.
It’s interesting that they started to get more bullish this week right at the wrong time. Specifically, the percentage of bulls rose from 23.7% to 32% and the percentage of bears fell from 48.5% to 40.4%.
