It’s an arbitrary title because anyone that believes they can predict exactly when the market will crash is ridiculous, but why not let the next collapse happen during the presidential election cycle?
This dot-com bust will be different, mainly because the publicly traded internet companies of today actually produce revenue. So, it’s highly unlikely that we’ll see another eToys or Webvan scenario. Most will remain in business after the market tanks, and many will replace other service providers who are too reliant on the “old way” of doing business, via visitors to a website or storefront, to succeed.
Having a storefront is already optional for the Instagram influencer who can just snap a few pictures wearing something cool and fashionable and post to 29,528 followers, where if 3% see it and like it and 3% of those buy, that’s roughly 25 sales with one post.
That’s on the low end. Kylie Jenner (Kylie Cosmetics) sold more than $330 million of lipstick and lip liner in a $29 “Lip Kit” during 2017, and all you have to do was follower her to find out more. I don’t know what her ambitions are, but watch out if she decides to build it into the next Estee Lauder.
While we’re not just getting started when it comes to online marketing, sales and ecommerce, the massive number of humans (at least in America) who stay glued to the tiny devices in their hands is astonishing. The attention paid to content creators is even more so. However, while platforms like Facebook, Instagram, Twitter, Snap, YouTube, Pinterest and LinkedIn deserve the bulk of ad dollars and even the inflated market caps to some degree, smaller firms are rising with the tide.
A prime example of the current dot-com silliness is Gaia (GAIA, Financial), a provider of online subscription video content, including yoga training. There are thousands of fitness apps on the market, many of which are free, and while Gaia seems differentiated, the company’s trading at 10x sales, losing $20 million a year and posting negative cash flow. This stock shouldn’t even be a publicly traded company, and at best two times sales would put the market cap in the $60 million range.
Another example is Hubspot (HUBS, Financial), the popular free customer relationship management (CRM) application. The SaaS has an incredible service platform (I use it), yet the whole company is valued at $5 billion and 12x sales. Even though it’s growing fast, it’s losing money fast too -- $56 million in the last 12 months. Hubspot matches up against the industry’s killer whale, Salesforce (CRM), which is also trading at 9x sales, but is 25x larger and profitable. At 5x sales, Hubspot would trade at $53 with a $2.2 billion market cap.
Zendesk (ZEN, Financial) is another high-flying dot-com bust waiting to happen. The company provides support and engagement products to websites and carries a market cap of $6.6 billion, 13x sales, but loses $122 million a year. The money it loses isn’t the issue -- it’s the fact that any business owner can hire a developer and build their own chat or support system for less than two years of Zendesk Suite. Or, if using Wordpress, there’s a host of products for free or nominal fees. Of course, convenience is worth a lot of money (just ask Uber or Lyft), and paying a low monthly fee is what locks most into services they remain in forever, or at least until the provider screws up. In any case, Zendesk is living the dream now. But since May, the insiders have been doing nothing but selling. At 5x sales, the cap is $2.5 billion and the stock is $23.
Finally, Shopify (SHOP, Financial) is valued at $14.4 billion, or 17x sales. It is another company that provides a very useful and valuable service to small businesses and that demonstrates the public’s silliness to pay up for a publicly traded company. With over 50 million small businesses and freelance sellers in the U.S. alone, the market is definitely wide open for the company’s payment processing and data analytics.
The problem is that it would have to capture 50% of the market to justify its current capitalization. And, while the company is a growth machine, generating better than 50% year-over-year revenue gains, the market is saturated with better or cheaper competitors. Shopify has a small economic moat because having to rebuild a database of products on a store is a time-consuming task few would want to take on. However, when a large portion of your customers are transient business owners, it’s only a matter of time before growth slows or turns negative. Shopify's trading at 5x this year’s sales estimate puts the cap at just over $5 billion and the share price at $49.
These are just a few of the stocks out of the dozens that will lead the way down during the next bear market. Others like Worday (WDAY, Financial), Dropbox (DBX, Financial), Tableau (DATA, Financial) and Twilio (TWLO, Financial) also trade at ridiculous valuations, but after the stocks get cut in half, these will be better buys. With that in mind, do not forget that Amazon (AMZN, Financial) fell by almost 90% from its high in 1999 to the low in 2001, only to rise by more than 15,000% since.
Disclosure: I am not long/short any stock mentioned in this article.
