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Holly's Blog: The Princes and The Pauper

31 July, 2020

In the face of the worst earnings quarter in the US since the Second World War, the tech giants are making a killing...

In the face of the worst earnings quarter in the US since the Second World War… (can we just stop and read that again as I think it’s become easy to be blasé about sentences like this at the moment…) THE WORST EARNINGS QUARTER SINCE THE SECOND WORLD WAR… pause to recover from the dramatic effect… the big tech guns in the States announced a cracking quarter. It's a tale of the Princes (tech) and the Pauper (the economy).

The combined market value of Amazon, Apple, Facebook and Google rose above $5 trillion for the first time ever, according to the FT. Apple reported revenues 11% higher and its market capitalisation (how much the company is worth) jumped by $100 billion yesterday. iPhone handset sales reportedly grew by 25% at the same time that the smartphone market as a whole fell by 14%. Amazon’s after-tax profits doubled: online retail sales were up a staggering 48% over the quarter. Google had the toughest time and the group revenue fell by 2%. But still... a fall of 2% in Q2 of 2020 is not something to get the hankies out over.

If you chuck Microsoft into the above tech pool and make an expanded club of 5, these dudes now make up about 20% of the S&P500 (basically the 500 biggest US companies you can buy shares in).

The big question is: Is this form over substance? Are these really still to be classified as tech firms – or just modern firms? Are those earnings calls going to be replaced soon with a wake-up call? Discuss.

The Lipstick Index is sooooo 2000s…

Everyone loves a bit of razzle in hard times. The Lipstick Index was a term coined by Leonard Lauder, chairman of the board of Estée Lauder, and described the increased sales of make-up during the early 2000s recession. When the Lipstick Index is high, stock markets are typically low. The idea is that smaller, cheaper, ‘feelgood’ items will rise in popularity at times of economic hardship – the only treats we can afford. Of course this theory is now relegated to the history books as anyone who has attempted to wear lipstick and a face mask will have worked out. (Is that just me – has anyone else had that sticky moment of realisation a split-second too late that they’ve just smeared a paint tube across their face, as the mask gets pulled onto your mush?)

Judging by my experience, I’d like to table here that we replace the Lipstick Index with the lockdown-appropriate Hairdye and Rosé index.

What is something worth?

The specific razzle of fintech companies was evident this week as investment app Moneybox raised a cool £7 million in crowdfunding. This is a nice app which allows ‘round-ups’ – so if you spend £4.50 on your linked bank account, you get the option to ‘round this purchase up’ to £5 and save the 50p into an ISA with a swipe right. I opened a test account here about 18 months ago and have £487.11 today. Without really noticing. You can read our review here.

The pre-money valuation (what a company is worth BEFORE they do any fundraising, the proceeds of which then get added to the valuation AFTER the raise) was a blistering £143 million. 2019 revenues were £1.6 million. That gives them a valuation which is (or was) 89 times more than the money they make a year. That’s a lot! But of course the argument is that they’re on a big growth journey and the biggest all started somewhere.

Last year, the leading robo adviser Nutmeg raised money too. They raised £4 million in crowdfunding on a valuation of £251 million. The registered 2018 revenues were £7.2 million. You get the scale of these multiples.

Both of these companies deliver a good service. They do something different. And they do it well. And compared to Tesla’s current price/earnings ratio of 775 times (i.e. Tesla is worth 775 times what it currently makes in a year), they’re jolly good value!

It’s a really interesting conundrum for investors at the moment. When we’re living though great change and uncertainty, it’s very hard to know if we’re in a ‘new normal’ or if things will ultimately go back to behaving as they always have. Are we in a tech bubble? Or is this just the new way of doing things? You could very well argue that the revenues of the Big Four at a time of ‘unprecedented’ (yawn, so over that word) hardship, make the slam-dunk case for digital businesses. But for those who learnt their investing craft in an era when companies made things we could see, touch and understand – and companies which rather boringly sold things for more than it cost them to make them, and companies which would be valued at between about 8–20 times annual earnings – well, it’s a funny old world to try and navigate.

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Who’s right? God knows. SO back to the old boring mantra. Diversify! Don’t have all your eggs in one basket. Then log off and try and enjoy the sunshine.

Happy weekend all – and Eid Mubarak to those celebrating!