Trading Desk: The Bear Went Too Far

Many of our positions have been rebounding so robustly that some investors scared by last year’s bear market are having uncomfortable flashbacks. “Is this a bubble,” they ask themselves. “Are these stocks swelling up too fast for their fundamentals to support?”

In my opinion, the answer is no. These stocks deserve their tremendous performance this year for a simple reason: while corporate economics generally move in the same direction as the stock in the long term, life is full of periods when the company moves in one direction and the stock moves in the other. This is how executives can say with a straight face that they aren’t particularly focused on the stock price. They’re focused on what they can control, which is the fundamentals.

But after an extended period of extremely volatile interest rates and economic expectations, the relationship between companies and stocks has gotten exaggerated to the point when investors lose sight of “normality.” Stocks went too far in the bullish direction back in 2020 and 2021, when the Fed was pumping massive amounts of money into the market.

Then they went too far in the bearish direction last year. Now, a lot of my favorite names are somewhere in the middle. Meanwhile, the executives have been busy improving the fundamentals behind the scenes. These are bigger companies than they were almost four years ago when the pandemic temporarily suspended all the rules. Bigger companies deserve higher stock prices.

Take Roku (ROKU) for example. It was an $83 stock a week ago and has doubled so far this year. That’s a dramatic rally that would ordinarily raise concerns. However, keep in mind that this was a $150 stock in early 2020, before interest rates plunged to zero.

In a relatively “normal” rate environment (positive and rising), that’s the price this company commanded. And here’s the thing: while Roku is still not profitable, revenue is on track to triple from where it was in 2020. The company is three times as big. Yet the stock is halved.

Granted, interest rates are higher now and investors are less patient with unprofitable companies, but management insists that they can break even any time they want. They’re only burning cash in order to reach for more ambitious goals down the road.

Is Roku worth $150? Ask me then. Was it ever worth the $490 it commanded in the pandemic bubble? We aren’t reaching that high right now. But the company that supported a $150 price nearly four years ago is now three times bigger than it was then. Suddenly the numbers don’t look so bad.

Stock after stock on my radar tells a similar story. The Trade Desk (TTD) has soared from $32 back in pre-COVID times to $84 today. It deserves that journey. Revenue and earnings are on track to quadruple from where they were then. (I’m comparing 2020 estimates to 2024 estimates, since the pandemic hit so early in 2020 and we’re so close to 2024 now.)

Zoom Video Communications (ZM) was one of the hottest stocks around in the pandemic, and no question, the bulls went too far. But it was a $107 stock right after going public in mid-2019. Since then, it’s boosted sales by 600% and delivered massive earnings gains.
It’s a bigger company than it was before COVID changed the way we work, socialize and connect. We live in a Zoom world now. Did the bulls go too far? Yes. Did the bear bite too deeply. Yes.

Look at PayPal (PYPL). Look at Bill Holdings (BILL). ServiceNow (NOW). Shopify (SHOP). Name after name slumped to pre-COVID levels even though the companies are now much bigger than they were before.

Take Microsoft (MSFT) for our final example. Yes, the stock climbed from $184 to $334 in the “pandemic era.” The company can back up those gains. Earnings next year are on track to come in 124% above 2020 levels. Management has expressed confidence in hitting that mark.

Double the earnings, double the stock. Is it really so hard to accept?