Forecast came true

The Market’s Magnificent 8 – What Rises, What Declines?
8 august

The past year has beat almost everybody’s expectations. Exactly one year ago, we were at approximately 1% growth and 1% inflation in the US economy and the bull market had been mostly insipid since 2014. 2015 had been a flat year; the first ten months of 2016 had been mostly flat. Later in 2016, we had an amelioration in business confidence, an uptick in tech demand, and some secular level of improvement to go along with ongoing “accommodative” monetary policies.

Now, since one year ago, we have a stock market up 20%. But the gains have been supremely uneven. About 50% of the gains in US stocks have come from 3% of the companies and it’s been disproportionately concentrated in the market’s top companies.

Borne out of this has been the acronym FANG (can double count the A), one of the more interesting stories and polarizing companies in Tesla, and AMD and Nvidia’s innovations have led to outsized gains for the chipmaker industry as well. A surge in bitcoin has also increased demand for their hardware for “mining” purposes.

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By September 1, which of these predictions will hold and which won’t?

Facebook (FB)

Holds $170.

A company I’ve always admired as perhaps the second-best business model in the world (behind Google’s) but was always too expensive for my tastes. It is one of the few companies that successfully combines growth, cash flow, and consistency. Two billion monthly active users helps in that regard.

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Apple (AAPL)

Fails to hold $160.

The iPhone 8 will launch in mid-September. Despite the saturation in the smartphone industry, Apple still holds the clear lead with over 80% of teens claiming they’ll buy the device as their next purchase. Apple’s network effects, as difficult as they can be to accomplish among consumer electronics firms, have exceeded expectations.

However, Apple is an inherently cyclical company, which often reflects in its stock price. Recent growth in tech demand won’t hold up over the next year relative to the past year.

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Amazon (AMZN)

Fails to hold $1,000.

Amazon is pricey, though one day has the ability to one day become the most valuable company in the world. Amazon has a high level of top-line growth but minimal cash flow. This is nonetheless largely due to the company’s reinvestment into the company and its long-term focus. But at the same time, it’s inherently in a low-margin industry.

The company’s logistics need to be improved for the sake of compressing costs and there’s current focus on expanding its “empire” as a means of better establishing pricing power. Amazon has been up and around $1,000, and the whole-number level seems to have sensitivity. Its valuation is not clear-cut as a growth company with low cash flow and volatility in the stock will consequently remain for the near future.

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Netflix (NFLX)

Fails to hold $180.

NFLX has essentially been a double since this point last year. Of the “FAANG” stocks, NFLX is the least monopolistic with competition from AAPL, GOOG, T, VZ, DISH, CMCSA, Hulu, among others.

The ability to differentiate oneself in the on-demand streaming niche will be critical, though the industry as a whole has tailwinds from cable cord-cutting and market demand for cable package de-bundling. As consumers extricate themselves from expensive cable plans, it’s feasible that the average individual could wish to subscribe to multiple services.

The average total lifetime value per customer is also high given the subscription based revenue stream. This makes the economics workable over the long-run. Long-term it makes sense to be bullish on NFLX, though its price has been bid up heavily to fairly nosebleed levels currently.

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Google (GOOG)(GOOGL)

Fails to run over $1,000 (GOOGL).

In my opinion, Google has the best business model in the world with a true monopoly in search. Its ad business is taking a hit predominantly through the competition from Facebook. While click volume is increasing, price-per-click is decreasing.

Though search will always remain Google’s backbone, its $20 billion per year in profit gives it leeway to have a hand in many tech-related ventures to diversify and limit the impact of mistakes that a leaner company doesn’t have the luxury of doing. Like Amazon, however, $1,000 has been a difficult level to hold and forward-twelve-months appreciation is likely to be lower than the previous twelve months. In general, I have stocks at 6%-7% nominal returns moving forward.

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Tesla (TSLA)

Holds $350.

I’m personally not on the Tesla bandwagon as it’s yet to prove that it has products or services in place that can sell at a positive margin. Gross margin that the company always references remains a red herring. Profit margin is what matters following the fact that the value of a business is the amount of cash you can take from it over its life discounted back to the present.

Maybe Tesla can make massive improvements in battery cost to make electric vehicles on par with gasoline vehicles in the near future, reduce the reliance on public funding to incentivize their purchase, and become a positively margined company. For now, they’ve yet to prove this and there’s a long way to go.

Even so, on the basis of potential and perhaps products or services that may come into existence that are not yet reflected into the share price, I expect the stock to remain elevated. Becoming profitable is not yet a time-sensitive matter, which makes the short argument shaky.

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Advanced Micro Devices (AMD)

I expect that $15 will have to wait.

AMD’s innovations have led to a massive surge in the stock price since early 2016. Though with so much of this forward growth already reflected in the share price, some level of consolidation is likely in order.

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Nvidia (NVDA)

Stays between $150 and $200.

Nvidia, like AMD, has surged since February 2016. NVDA competes with AMD in GPUs and produces system on a chip units (SOCs) with INTC and QCOM as its major competition.

With autonomous driving technology ratcheting up in the coming decade-plus, the companies’ GPUs are likely to be in high demand and continuous demand for artificial intelligence and machine learning will keep business firing on all cylinders.

Its stock is facing a similar conundrum to AMD’s with a high level of forward growth already priced in. But unlike AMD, the stock has exploded another 70% since March.

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Bitcoin

Holds $3,000.

Cryptocurrencies appeal lies in the ideal of a decentralized and frictionless means of exchange mechanism that can increasingly become a substitute for everyday fiat currencies.

However, with a burgeoning number of cryptocurrencies, network effects will be instrumental to capture market share and prevent the supply part of the equation from cratering its value.

Bitcoin was more or less a first-mover in the crypto industry. Ethereum, though, has seen a massive burst in value. Others, such as litcoin and ripple are also gaining popularity. Will the market eventually settle on one, a few, or many?

My guess is toward more of a monopolistic/oligopolistic market, with users eventually coalescing around one or a few, for the same reason Facebook became the social network of choice among mixed primitive (photo + text) mediums. If 10% of your friends use coin A, 10% use coin B, 10% use coin C, it becomes less convenient, leading to some logical plausibility that the market will be dominated by one or a select few.

Bitcoin is currently in good shape in this regard, though the landscape and valuations are shifting rapidly literally on a daily basis.

How many of these predictions come true by September 1?

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Summary

FB – >$170

AAPL – <$160

AMZN – <$1,000

NFLX – <$180

GOOGL – <$1,000

TSLA – >$350

AMD – <$15

NVDA – $150-$200

Bitcoin – >$3,000

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Agree – 6 or more

Disagree – 5 or less

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The Market’s Magnificent 8 – What Rises, What Declines?

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Forecast came true

7 of 9 were correct (incl. bitcoin). FB holding $170 and AAPL going below $160 were incorrect.