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The politics of price: When great businesses are bad investments


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

If the big story of equity investing in 2020 was the stratospheric performance of big tech, the question for 2021 and beyond might be how long these stretched valuations can continue.

First published in the Daily Maverick 168 weekly newspaper.

The Nasdaq, the main US index for tech stocks, is now in correction territory, dropping 10.51% from its high in mid-February. Is this a harbinger of more pain to come for the tech darlings?

Tesla, the manufacturer of electric cars, is perhaps the poster child of this slump. While it was last year’s best-performing stock on the S&P 500, according to Bloomberg the stock has plunged 35% and lost about $308-billion in market value in the past two months alone. Investors might, at this point, do well to remember the adage that even great businesses at the wrong price will be poor investments.

The example of Cisco

In 2000, at the peak of the first dotcom bubble, Cisco was one of the most hyped businesses on Wall Street. The investment hypothesis was solid: as a manufacturer and provider of networking equipment for telecom players and other businesses, Cisco was a sure bet.

In the year leading up to its peak in March 2000, Cisco’s share price rose 236% to a market cap of $555-billion. What could go wrong? Surely this was a business that would be one of the corporate titans of the 21st century?

Yes and no. Regarding the business, nothing much did go wrong. Cisco continues to be a major provider of tech equipment; since 2000 its revenues have grown four times to almost $50-billion today. Net incomes this year are about four times what they were in 2000, at about $14-billion. And yet, while the business was solid, the price was insane. Today, Cisco’s share price continues to languish at about 40% below where it traded on that promising spring day of March 2000.

Recounting this story, one is forced to ask that even if one has absolute faith in the business models of Amazon, Tesla or even Beyond Meat, how realistic are their valuations?

While SA investors might not have to worry about the same preponderance of overweight tech stocks on the Johannesburg Stock Exchange (JSE) as on the Nasdaq, they should not be without caution.

For investors who have succumbed to the increasingly popular notion that it is smarter to “buy the index” through an exchange-traded fund (ETF) rather than an actively managed fund, this would mean that more than 35% of their total equity is invested in the Naspers/Prosus family of businesses, which is almost entirely dependent on Chinese tech company Tencent for profits. It’s a reality worth repeating: More than one-third of the market cap of the SA stock exchange is predicated on a tech company in China. While this is not in itself a bad thing, investors should be asking whether the stellar performance of this business over the past 10 years is likely to be repeated over the next one or two decades.

In the past 10 years, the market capitalisation of Naspers has gone up six and a half times, while its revenues have broadly stayed the same. It currently trades on a price-to-earnings ratio of 43 times, admittedly far off the lofty heights of Cisco but hardly decent value. Following the past year of valuation expansion, has all the growth over the next 10 years already been priced in?

The question must then be, for those investors who are (even indirectly via an ETF) exposed to Naspers/Prosus/Tencent, how confident are they that the share price of this business is going to be materially higher than it currently is in 10 years’ time, even if the business does deliver on its promise of being an emerging markets tech champion?

Whether or not this transpires, one thing is certain; following the recent tech boom, the JSE’s long-term performance is inextricably bound with businesses whose valuations look stretched. Regardless of what happens to these companies, investors should hope that, even if they continue to be great businesses, the price is not entirely wrong. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.


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  • Craig Ulyate says:

    What is the key indicator for a market ‘reset’. Maxed valuations, bottoming of the consumer credit cycle and inflation..all together?

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