The market has hit tech stocks pretty hard but that does not change our long-term view on these companies.
May 11, 2021
The market has not been kind to a number of previously high-flying tech stocks with many seeing selloffs cut their share price dramatically. That’s something we certainly don’t like seeing, but it also reminds us that at 7investing we focus on long-term (at least 3-5 years) buying. When you do that, volatility and big price swings are part of what you expect to happen.
That doesn’t mean it’s fun while it’s happening. On the May edition of “7investing Now,” Simon Erickson, Dana Abromovitz, Maxx Chatsko, Matt Cochrane, and Steve Symington joined Dan Kline to take a look at what’s happening while also reminding viewers why we still feel great about our portfolios.
A full transcript follows the video.
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Dan Kline: Hopefully, with that being said, we’re gonna segue over to talking about what happened in the market yesterday. I’m not gonna belabor it, but we had a lot of high-flying tech stocks, Teladoc, Zoom, Fastly stocks that that many of us and our friends are have been very high on stocks that a lot of investors have owned for a long time. And well, Simon, the bottom came out yesterday, we saw Fastly down, I don’t know, 30% 40% over a couple of days really kind of kind of terrifying numbers in the short term. But Simon, can you talk a little bit about what happened? And explain the difference between volatility and risk?
Simon Erickson: Sure, absolutely, Dan and you know, this is something we don’t take lightly, we take it very seriously, when you see a stock that drops 25 27% in a single day. And we don’t want to make it seem like we’re just kind of making light of it. And oh, and you know, haha, just carry on. But I do think that the important thing to realize is that there is a difference between short-term volatility and long-term capital impairment, or risk. If you’re investing for multiple years, and you know that you’re going to keep your money into a certain stock or into the stock market for three or five years. It doesn’t really matter if the stock goes like this, or if it goes like this.
And so when we see these blips, like we did yesterday, for several of these high flying tech stocks, we asked ourselves, is this something that we should really be worried about, because there’s a risk of permanent impairment of capital that we will not recover our money back from? Or is this just a spot between point A and point C, which is interim point B that we don’t have to worry about? Because it’s going to recover again? And so that’s how I like to frame things. When I look at these companies.
Is there something wrong with the business? Is there something wrong with the financials that we should be worried about? Or is this just the market saying, I don’t want to pay as high of a price to sales ratio for these tech companies anymore? And if that is indeed the case, that this is just valuation-related, that as a long-term investor, you really do not have anything to worry about because the vast majority of long-term returns come from fundamentals, not from valuation corrections.
Dan Kline: And Steve Symington, I’m going to throw it to you because one of the challenges here is separating people will ask us, oh, my God, why did this happen? And sometimes the Why is meaningful, maybe Ark Investing sold out of a position, and they sold so much it drags the stock down. But sometimes the why and the why for Fastly was growth wasn’t as fast as people expected. And the CFO is leaving. Doesn’t justify the fall. But how do you look at this as an investor?
Steve Symington: Man, I, a lot of people, just one of the one of the big things they that I think you need to focus on is is my thesis broken? And that’s one of the biggest things that I focus on when stocks are plunging. And this happened last March, where we actually, you know, we saw a lot of the positions, you know, we launched on March 1, 2020. And we released our first recommendations, and I watched a couple of those names, plunge 65% in three weeks, it was insane.
Felt insane, but I’ve seen it before, you know, we’ve all of us have been there before. And it doesn’t feel good at all. But I looked at a couple of those stocks and said nothing has changed. And, you know, sure enough, you know, a couple of them are solid triples, since then on our scorecard, just for hanging on and for people who actually bought you know, on some of those, apply the dip, right.
But some sometimes you just have to look at and say, you know, I like the stock for a reason at this price, and sometimes huge drops like that are unjustified and you know, I would argue somebody’s you know, selling out a stake Ark sells a stock and drives the price down or something. I’d argue that’s not that meaningful. I’m looking at company fundamentals. And I’m looking at market capitalizations valuations relative to the stock’s long-term potential. And that’s what I focus on. Is my thesis broken If not, I’ll consider just adding in, you know, bits at a time.
Dan Kline: It’s also important to note that stock prices aren’t related to reality. It’s a when you sell a house, your house is worth what the highest bidder will pay for it. And there’s a little bit of a game there of well, is that better qualified when they get a mortgage? Will it be easy. With a stock you might sometimes see just a wave of momentum we saw it this summer with or this spring with GameStop.
GameStop didn’t magically become a company worth 100 times what it had been selling for. A lot of people bought it. I’ve talked about just buying a condo, the condos I bought went up in value by about $20,000 because a lot of people went you know where it’s nice to visit when we’re in a pandemic, Florida in a resort-like setting, that seems great. So the values went up two years from now maybe everyone would be like, you know what’s awesome during the zombie apocalypse? Skiing in the mountains and all of a sudden ski villas will be worth a lot and crowded resort plazas won’t be. So it’s all relative.
Matt Cochrane, I’m gonna come to you in a minute after talking to Maxx, I’ll let you introduce a graphic or a chart or whatever it is you’d like to do. But Maxx, you generally invest in much more volatile spaces than we do. How do you prepare yourself for the fact that a biotech company depending on news could sometimes legitimately double or triple you know, some major approval, it might be worth a huge multiple or it gets denied. And all of a sudden they’re back to square one. How do you mentally deal with that?
Maxx Chatsko: Yeah so this is just part of, you know, you had to accept volatility when you do when you invest in early-stage drug developers, you know, so again, not to, like, make fun of what happened yesterday, or volatility in the market now. But everyone’s freaking out, like yeah, Welcome. Welcome to the club. Guys. You know, your stocks down a little bit. Wow. Yeah, absolutely. You know, it’s just part of the long-term mindset, right, you’re thinking about, again, your thesis. And yeah, there’s certain de-risking events that have to happen for drug developers, right. Sometimes it’s clinical trials or partnerships, or certain commercial milestones. And oftentimes, those are far out in the future.
I think I brought this up in a recent show. But you know, I started here 7Investing, my first pick was September 2020. So I’ve made whatever eight picks or so since then, nine, maybe. And, you know, the nearest term milestone for any of my companies I’ve chosen is still mid 2021. So none of them have had any milestones yet. So it’s kind of just pretty boring, you know, we’re waiting in here. So it’s a lot of patience required in a lot of the companies. I’m looking at 2023 or 2024. So it’s, it’s, in a way, it’s a perfect way to you know, orient yourself to long-term mindsets.
Dan Kline: And I just had a lizard crawl over my feet. we are not going to think about the salmonella possibilities there. I guess I will not touch my feet and lick my hands anytime soon. We’re going to go to Matt Cochrane, then we’re going to go to Dana with a little bit of a different swing, and then we’ll go back to Simon Erickson to sort of bring up some points and some data on Fastly. Matt Cochrane, you’ve been doing this a long time, you are not scared by a 10% 20%, even a 40 or 50% drop?
Matt Cochrane: Yeah, I mean, unfortunately, I mean, that’s the price we pay for great gains and investing. That happens even with like great investments. Like Sam, I think we have a chart. But like, as far as like, my personal investment in Square, I bought it in early 2017. And for the first couple of first year and a half, it was a phenomenal investment went up right away. But for about two years, from about late 2018, to mid-last year, mid-2020, it was down from its all-time high. And if you bought like near the peak in late 2018, it was a tough go for almost two whole years. But then again, like, you know, like the stock picked up, like COVID was actually a tailwind for it after like it was feared that it was gonna, like hurt the business. And, you know, it’s all outstanding gains last year.
And that’s the nature of stock investing. So Square was a been a great investment since 2017. Fantastic investment. And yet, for almost two years of that time, there’s only a four-year period for almost two years of that it was down from its all-time high. And that’s kind of what you almost have to expect. When you do long-term buy and hold investing, which I think is still like the best way to invest. The best way for most investors to capture gains, you’re going to see times that are very frustrating, even as the business does well, the stock price will not always reflect that.
Dan Kline: So Dana Abramovitz, here’s how I approach it. I don’t look at my portfolio every day, I have to look at it more often, because that’s kind of what I do for a living. But when I didn’t do this for a living, even when I was writing about the market, I looked at my portfolio, like when I bought or sold something, because that’s where I had to go to buy and sell. From an emotional point of view, if you happen to peek at your portfolio and see, like, you know, you know, it’s an absolute red bloodbath, how do you deal with that from a mindset basis?
Dana Abramovitz: Still, a lot of the team have been talking about, you know, going back to your thesis, right. So, you look at the fundamentals, you know, is this a solid business? Do I believe in it? Do I believe in the management, and just, you know, sometimes it’s hard, you know, like, I tell people all the time, you know, just take a deep breath, let things go, right. But you got to do that. And just kind of move on and just be, you know what, I believe in this?
Oh, sorry, I’m back again. You know, I believe in that and, you gotta hold your ground, stick with it, and just, you know, realize that, you know, the market, you know, it’s just people, right, it’s people and their emotion, and that’s kind of driving things and you can’t let other people’s emotion affect yours.
Dan Kline: We would love your questions and comments. We see a few in there. Simon, maybe address the second comment from Sandeep David, while you are making some points on Fastly, we absolutely appreciate you doing that, Simon.
Simon Erickson: Yeah, sure. And thanks, Sandeep. Also for mentioning JFrog. You know, you put up a CI CD, continuous improvement, continuous deployment. Obviously, data monitoring is very, very important right now and that’s that DevOps field is trying to break down a lot of those silos as you already know.
Question about Fastly, you know, if we can put that up there, I suppose I value Fastly under risk reward. I think it’s extremely favorable due to high likelihood it gets bought out, the longer it stays in such a low market cap, low downside possibility of high upside. This is actually something that I presented the idea that In February, I haven’t seen it. So I was kind of going out on a limb and saying, I think that’s Fastly does get bought up, I think it got its gets most likely bought by Amazon. Maybe Akamai is on the table too. But I think there’s definitely a suitor for the relationships that this company has with very lucrative enterprise customers. So when we’re talking about the customer count for Fastly, right now, it’s only got 336 enterprise customers, right. That’s not going out and going after 8,000, 10,000 customers like so many of these companies we’ve seen. It’s deriving 90% of revenue from those big dogs from the enterprise customers.
But then let’s also look at the average sales that it obtains, the average contract that it’s got from an enterprise customer a year ago was $600,000. Today, that’s closer to $800,000. So these are big fish that are really signing big contracts with Fastly, it’s got really, really good retention rates with it too, it’s just struggling a little bit and getting involved with the mass or with the mass market, smaller businesses.
And so I still think that that’s very lucrative for any potential suitor for this. I think there’s a floor on Fastly stock price. We’ve probably hit that floor if it wasn’t even a little bit higher than where we are today. But I’m starting to dig into what’s that relationship between going after the high end of the market versus the potential risk of others competing and putting competing away from it as they’re trying to get more and more involved in edge computing to get closer to those users.
Dan Kline: I think it’s fair to say nothing changed about the Fastly business yesterday. They didn’t come out with some terrible piece of news, they didn’t lose a giant customer. Steve, you follow the news all the time, and I’m going to throw to you in a second here. Anybody who wants to talk just give me like a finger up, because I know we have some graphics and some charts and, and some things we’d like to get in.
So I will try to get to everybody after Steve here. But Steve, in the day following the news yesterday, I know you didn’t look at every company. But is it fair to say it was really just a market sentiment day and not a nothing changed for high-flying tech stocks?
Steve Symington: Right, I think I did peek at my portfolio yesterday, after Simon mentioned something on Twitter, and it was down, I think five and a half percent at one point. You know, a single day that that feels painful. But you know, I went shopping in the processing, like, I see a lot of the really high growth stocks, you know, down hard. And, you know, part of the concern and you know, there’s so many different narratives that are being thrown out there that they’re possibly causing this. And, you know, there’s there was concern over, you know, Feds easy money policy kind of disappearing. And some of that’s abated today, because of the worse than expected jobs report we saw.
I think a lot of people anticipated that jobs report coming in with at least a million new jobs added it came in at 266,000. Most of those were in the hospitality industry. So now we have the Fed, basically has an excuse to keep injecting money into the system. So people are actually encouraged. So you have tech rallying on a bad jobs report, it seems counterintuitive. And then, you know, pivot to reopening stocks, you have all these different things going on.
But a lot of those really, really steep declines yesterday, were really on no notable company specific news. And, you know, I think at a certain point, a lot of these growth, these high growth stocks that were kind of steeply valued earlier this year. You know, they’re they’re starting to become pretty attractive again, and I’m gonna have a hard time picking my recommendation on the first by the way,
Dan Kline: Sam Bailey, I am going to go to some of the Twitter graphics we have in the doc so if you have those prepared, be ready. But before I do that, I’m gonna go to Maxx Chatsko. Because Maxx, you talk about valuation, more than any of us in our private slack channels. Are there stocks that you love, that you don’t buy, simply because they’ve got ahead of themselves in value valuation?
I’d argue that, you know, with Fastly, it’s not like we reopen, we’re all gonna like throw our computers in a river and like, you know, get an axe and become, you know, wilderness men or whatever it is, or, you know, Dana is not going to go, you know, move move into the country and get rid of her phone. Like obviously,
Simon Erickson: That only happens in Montana where Steve is Dan. Yeah.
Dan Kline: Yes. Steve is not wearing his Brawny shirt today. But it is very, very similar. It is one of those situations Maxx, where do you sometimes have companies on your watch list where on a day like yesterday, you go, Wow, like, I just got five years back and I can jump in.
Maxx Chatsko: Yeah, and it’s important to frame this as you know, parts of the market I covered right. So biotech or clean energy. I think in the last year, those have been two of the more bubbly, maybe not a bubble, but you know, a little more elevated valuations there. So you maybe can’t draw too much comparisons to tech necessarily, right?
We know when biotech elevations are our biotech valuations are elevated there’s no recurring revenue to go on, right? People are just kind of pricing in Oh, that clinical trials gonna be perfect. And that’s never how it really goes in drug development. So when I’m worried about valuations, it’s more because there’s so much uncertainty in drug development. But yeah, I mean, I went, I’m all tapped out with some kind of a way to get more money in my account. But I did go shopping on the last week and yesterday as well. So I definitely use dips like this again, when there’s no change in the thesis. It’s a solid company. Definitely, you know, went out and added some positions.
Dan Kline: Matt Cochrane, can Maxx borrow a few thousand dollars he’s got some stocks he’d like to buy.
Matt Cochrane: No, I don’t like Maxx’s stock. So definitely not. I’m just kidding.
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