Ask HN: Are we in tech-stock bubble? | Hacker News Reader

Ask HN: Are we in tech-stock bubble?

39 pointswtznc71 comments

How would you justify current TSLA stock price?

No one ever answers a question like that to a satisfying degree.

I made a bunch of money speculating on the swings of stocks. Not with options, just patience, and it enabled me to make wild returns. For example, I bought and sold Virgin Galactic 3 times over the past 13 or 14 months, which tripled my initial capital. I did similar but with a risky few pharma stocks. PLTR tripled since IPO (and unlike AirBNB it wasn't rigged to benefit banks-and-friends) so that's another 200% return. While many people dump their capital into index funds, I keep most of my money in cash and speculate wildly with a fraction of it, and my returns over the past 5 years exceed what many large funds do. I also learn about industries and follow news that I wouldn't otherwise. Stock market index funds terrify me because I want to use the cash in the coming years for property.

I don't know, but none of this seems healthy and normal. I've been following the financial press for a long time almost daily, and I'm pretty confident no one's proclamations of the bottom or top can be trusted in advance. We'll know in months or years whether we're in a top.

> For example, I bought and sold Virgin Galactic 3 times over the past 13 or 14 months, which tripled my initial capital

You would have more than tripled your capital if you'd bought 14 months ago and held until today.

That's patently incorrect, actually. Today the stock is 24.39. On 30/10/2019 I purchased a quantity at $12.40.

Let's continue. I sold it all in 2/2020 in 3 separate transactions between $32-$37. Later, I repurchased it at $22, and again two more times as it dropped to the 18's. I then sold everything again at $28... about 10 days ago.

So it was two sets of purchases and sales, not three.

So no, buying and holding would have not maximized my gains. And this is true for many stocks.

By the way, this is in an IRA account so there is no need to think about short v. long-term cap gain taxes here. The behavior in my main brokerage accounts accounts a bit more for the potential tax implications. However, if it's a volatile stock and I think went up or down in an extreme way that I think isn't justified, I'll jump in.

No disrespect intended, but unless you have insider information, this is almost certainly luck and, used as an example, is simply selection bias.

The markets have never been more efficient. Beating the market consistently over 5 years, particularly these last 5 years, which have been part of an unprecedented bull run in the market, means nothing. There's been many hedge fund managers who pulled off outsized returns over those sorts of timeframes only to go on and fail in subsequent endeavours.

What portions of your returns are due to luck in your view ?

Also you said you entered and exited virgin 13 times. How do you time your exits. Are you willing to reveal your strategies or algorithms?

> For example, I bought and sold Virgin Galactic 3 times over the past 13 or 14 months

Another commenter mentioned this, but it's important to understand the net present value calculation, which is:

NPV = Rt / (1 + i)^t

Rt is the incoming cash flow at time t, and i is the discount rate. This is the "theoretical" way that businesses should be valued: estimate their future cash flows, then discount them back to the present to take the time value of money into account (of course, in the real world, there is a lot more that goes into the price of stocks).

The issue is that as the discount rate approaches 0, the net present value then equals the same as ALL future positive cash flows. For large, perpetually operating businesses, this can then turn into something between "a lot" and "infinity".

Again, there are lots of other things that go into actual stock prices, but our economic system really is in new territory when the discount rate approaches 0 (or heck, goes negative!)

For those of you following at home, the discount rate is correlated with the federal interest rate.

What's the real ELI5 reason for this though? Why does a drop in the fed rates from 1% to .2% matter much more than a drop from 4% to 2%?

Exponent?

Yeah but besides the math part of it... what’s the actual explanation? Besides “that’s how it impacts the formula!”

This is only true for profitable enterprises. The rest is same as ponzi scheme.

The Fed has flooded the financial sector with cash. That cash has to go somewhere. Every security with a CUSIP and a price tag is getting inflated as a result.

TSLA? Not justifiable from a pure numbers standpoint.

But - other tech stocks? Arguably justifiable. Since the risk free rate (treasuries) has cratered, this has altered the DCF calculation that analysts use to value a company (the outcome is essentially this: the company is worth more, because this risk free rate is used in discounting the PV vs FV of the company’s cash flows).

Thus, it makes sense to have companies worth more (compared to historical price-to- earnings comparisons).

Then on top of this, there is a somewhat deflationary force of tech companies providing more efficient means and processes to things - which further perpetuates the cycle of these companies being worth more (their inputs cost less and are less labile, and their outputs are greater than say, a mining or oil company)

One thing I don’t understand is this DCF rate is essentially decided by the government. It seems weird to me that all the government needs to do make the stock holders richer is to drop interest rates to near zero. That seems like creating wealth out of nothing.

Isn't the asset wealth being created at the expense of interest income from cash holdings (e.g. savings accounts and the like)?

The Federal Reserve, while chartered by the US Government, is not a Government organ. It's really a bank, and it's owned by it's member banks.

It creates money out of nothing, which is distinct from wealth.

TSLA is easily justifiable. Their entry into other markets, like home-installed batteries (PowerWall), solar roofs, HVAC, home automation, trucking, robo-taxis, etc. all make it very attractive. Even just selling their batteries at retail stores like an Energizer or Duracell would add a few billion to their revenue stream. They’re a solid 5 years ahead of competitors in terms of battery and self-driving capabilities.

Besides, even if none of those bets pay off, they still sell 3-5 million cars a year at over $50k per unit, and waiting lists for more buyers and don’t pay a dime to a dealer network. Once their fully autonomous self-driving software is released, I see them at a $1 trillion valuation (roughly $1000/share) easily.

Curious, do you have a rough timeframe on when you think this will play out? Just roughly speaking - I don’t have an angle, just haven’t thought of it in this manner before.

How is self-driving software that useful at all for a consumer driving a car?

Nobody is gonna trust the car to drive while they're napping or working on their laptop lol.

TSLA? No idea.

But I think there's often some hidden game going on with tech companies that go well beyond selling more sugar water and expanding overseas to places that haven't seen sugar water before.

Amazon is the best at this... using one business to launch a second.

So what I'd look for with TSLA is not whether cars can ever justify this price, but whether there is an adjacent business that is actually bigger than cars. Is there? I have no idea.

There is a secret sauce: pairing a company (Amazon.com) with heavy net operating losses (NoLs) with a very profitable company (AWS).

The result? Amazon pays zero taxes and can continually expand. The NoLs offset the profits, and every time Amazon has a division that becomes profitable they offset it by entering a promising but loss-inducing new sector. Then, when that division becomes profitable - rinse and repeat.

This is Bezos’ genius.

> This is Bezos’ genius.

His genius is gaming a readily game-able tax system for personal gain and public loss?

I do agree it's what he's good at, but I disagree about it being "genius" and question whether it's worthy of praise.

Concurred.

Are taxes such a serious constraint on company growth when funding is so easily available ?

Hm. Not sure, that’s an excellent point. It may not be a constraint, but I think it is a massive incentive.

ARK put out a prospectus that details where they feel Tesla's revenue may come from. Scroll down a page or two and you'll see the tables they're using.

https://ark-invest.com/articles/analyst-research/tesla-price...

Wow, they give Tesla a 30% chance of launching a fully autonomous taxi network for revenue in 2021. That seems wildly optimistic.

Great article, thanks for sharing!

Not sure about Tesla, but for the tech industry in general a lot of companies/startups have been propped up by other startups having near-infinite VC cash to spend on them so the profit made by these companies wasn't actually correlated with the value they provide. The market will have a big wake-up call when the VC money dries up and these companies will be in serious trouble.

I think advertising and marketing is a good example of this. The amount of advertising a typical person is exposed to has increased by orders of magnitude but the amount of disposable money people have hasn’t followed. Given the primary objective of advertising is to drive a purchase (either directly or indirectly through brand awareness), an adjustment is bound to happen. Currently a lot of advertising & marketing is propped up by VC-funded companies who burn unreasonable amounts of money on customer acquisition in an attempt to monopolise their market, but these attempts are petering out which in turn means the advertising companies’ revenue would diminish and get closer to the true value of their services. We’re already seeing this on major platforms where they cram more and more ads in, in an attempt to maintain their revenue despite the declining value of their ad slots.

Responding to the question, and the comments:

It could be worse. Much worse. It could be the great depression, caused by massive shrinking in the money supply. Nobody likes growth in the money supply (well, ok, debtors do). But, it's better than a shrink. Or as Ray Dalio sorta says, a beautiful deleveraging.

Yes it's a bubble, defined by everyone saying it's not a bubble. Is TSLA justified - no and yes. Purely monetarily, no. But in relation to all it's competitors yes. They're all FUBAR. Most of them don't have a clue about either EVs or self-driving. They are horse carriage companies in the age of the Ford Model T.

Relative to their competitors, yes, TSLA should be ahead as a measure of future growth, or future ownership of the transportation sector. There is little doubt how clueless their competitors currently are. But it's still arguable TSLA is ahead of the curve a little.

Will TSLA come down? Different question. Now they're in the S&P 500 this isn't simple. Probably not. If you transpose or invert the question - who will challenge TSLA? Crickets. Silence. That's why TSLA is so highly valued. There is nobody even close. LOL NKLA.

Will tech stocks come down? Yes, but there's many ways to think of it. Will covid end? Yes, this too shall pass. tech stocks will come down but relative to what? The dollar? Maybe. But more likely everyone else will catch up a little.

Stepping back - let's ask a better quesiton. Who's long tech stocks? What would you bet tech stocks go up (a dollar? 10 dollars? 100 dollars..?). These questions are better asked as bets or about current positions.

> They are horse carriage companies in the age of the Ford Model T.

I disagree. If you discount self-driving (and I do), then there are clearly other manufacturers who know perfectly well how to produce an EV. I own both a Tesla and a Bolt, and neither is a clear winner over the other. They each have ups & downs, but in any case GM produced a perfectly good EV. And Ford's Mach-E appears to be an improvement on Tesla's Model Y. The game is on, and the big boys seem to know the rules.

I've owned multiple Tesla and LEAFs. I've test driven a Bolt. A Bolt to a Tesla like Salieri to Mozart.

Where to even begin? Thin seats. Smaller car. No charging network. No self-driving. No remote software updates... It's a long list.

Does GM even know how to make a car these days? TSLA has massive growth problems. I've had my own issues with my Tesla cars. But how could we even talk about Bolt and Tesla in the same paragraph?

We should be talking about BMW. My past BMW service experiences were far better than Tesla. That's comparable to my Teslas. Who cares about GM?

If, one day, the Mach-E ships, and anyone buys it, and it has anything near AutoPilot then maybe we can talk about it. But right now the Mach-E is about as useful as a NKLA truck. With no charging network. Or AutoPilot. So it's basically a bigger LEAF.

> Thin seats

The Tesla seats are awful compared to pretty much every other car at the same price point, so I'm not sure this is a good point. The Bolt seats aren't great either, but they're not significantly worse.

> Smaller car

Yep, more nimble. Not as powerful, for sure. But more tossable. Much tighter turning radius.

> No charging network

Except it can use standard non-Tesla DC fast-chargers, and those networks are collectively growing much faster than Tesla is growing the Supercharger network.

> Does GM even know how to make a car these days?

Uh, yes? They've always had the engineering chops, even when they cut corners and made duds. My last car before the Tesla was a Camaro SS 1LE, and it's so far on a different planet from anything by Tesla that it's unfair to consider Tesla a car manufacturer at that point. Yeah, GM knows what they are doing, what a silly thing to say!

> We should be talking about BMW.

No, we should not. They make exactly two cool cars now. The rest are just as cookie cutter boring as everything else.

> Who cares about GM?

Anyone who likes cars? I get that this generally rules out Tesla owners, I accept that. But GM makes the mid-engine Corvette - at a price point normal people can even afford! And Camaros, and many other cars. Hate on them all you want, but they're a very legitimate car manufacturer.

> If, one day, the Mach-E ships

It is...

The Mach-E has a nicer interior than a Model 3, and even has an actual dashboard screen in addition to the big center one. Not to mention an analog-ish volume knob. I bet it uses actual rain sensors, too ;). Maybe even a manual glovebox release.

Tesla is good at being different, and their drivetrain technology is excellent. The rest of the car is just barely acceptable, and only if you squint, and only if you've never ridden in anything with Recaros, etc. I like my P3D but only because there isn't yet anything equivalent, aside from the just now shipping Mach-E.

Visual/interior specifics, smaller - they will adjust to what the market wants Charging network - not hard, will be there soon Self-driving - more of a "cool" feature, will be industry standard in a decade anyway Remote software updates - trivial to implement, will be standard

TSLA has nothing unique besides brand and battery tech. Battery tech is definitely going to be ubiquitous in a decade. They're already nearing an ideal range and charge time for average usecase.

Like I said, self driving is like a nerdy "cool feature". Nobody is gonna do something on their computer or take a nap or something.

Your post reads as if you have already decided to discount everything that is not Tesla. You seem to be in a cult.

I test drove the Bolt and the Tesla, and the Bolt is a MUCH better value for the dollars paid (you can get it for around 30k$ with a bit of haggling). Saying that GM doesn't know how to make car is laughable.

Every single person has no simple way to save money anymore. Savings accounts, CDs, and money markets - even high-yield online ones like Ally and Goldman Sachs - pay zero interest or close to it. Simultaneously the government has printed an absolutely incredible amount of money this year that has almost exclusively gone to the wealthy. This is because the fed is buying treasuries / corporate junk bonds and backstopping our entire economy while the actual economy has shrank maybe 10%. A tiny amount of the printed money is airdropped to citizens with direct checks or extended unemployment but this is a tiny amount that is primarily to buy off the commoners so they don’t complain about the enormous wealth transfer happening right now.

What this means is scarce financial assets are going to go up, and up, and up. Every person who doesn’t want to lose money needs to become a risk manager and start investing because there is no other option.

Its pretty crazy how no one is talking about how only 18% of the stimulus bill is going to individuals. I'm by no means rich but I made 80k passively this year so I don't know which side of the wealth transfer I'm on.

If you make $80k passively, you are above average and likely border on rich.

If you don't mind me asking, how'd you make 80k passively? Investments, properties, or a "passive" sass/tech product?

Stock market. Coronavirus was financially beneficial for the corporate portion of the upper middle class.

or the value of the dollar has dropped, which makes demand for equities higher (causing their price to rise).

You didn't create more wealth - the equities didn't become more productive (cept may be the tech companies did more this year and thus have a deserved rise in price).

You made 80k in dividends or appreciation in the value of your stocks? The latter is not usually considered as "income".

It’s odd how it seems the US is capitalist on the way up, and socialist on the way down (for big co’s and industries - airlines, banks, ect).

Good for equity investors. But - Individuals? We’re on our own. A bit crony, in my mind.

True capitalists do not applaud the crony capitalism common throughout the entire world. Japan’s government now owns sizable percentages or even outright majorities of all major corporations. The endless appetite for debt-fueled stimulus has led to crazy malinvestment that will be an extremely difficult pill to swallow when the bill finally comes due.

Why even tax us anymore? If it’s so easy to print new money just sum all the money necessary for the budget and print it fresh. Basically the same thing at this point.

> Japan’s government now owns sizable percentages or even outright majorities of all major corporations

Is it a positive or negative thing? (honest question, I don't have much knowledge in this area)

Very negative. It allows for zombie companies to survive for far longer than they ideally should have. So many companies in Japan that should have gone bankrupt years ago but are still surviving. Also makes everyone complacent and uncompetitive at global scale, which has been the theme for Japan for past few decades.

The government is not good at creating and sustaining businesses despite their nearly unlimited resources and centuries of attempts. When the government owns large stakes in businesses then the business operations become political, as the government is elected and the government owns the business, so the business is now answerable to voters. The business will be encouraged to make malinvestments in politically important projects and regions, allow unproductive employees to remain, and lead to general stagnation.

Some socialists have openly stated that the end goal of democratically run companies can be attained by funneling government money directly into buying equity stakes in businesses, growing over time. This would be an extremely terrible outcome for anyone that likes productivity and efficiency.

You can't (I think?) do progressive QE, so for most developed economies that's not the same thing.

>What this means is scarce financial assets are going to go up, and up, and up

Until they don't...The exuberance I'm seeing lately scares the shit out of me. This is going to be a horrific crash when it comes.

Same feelings here...

I've been feeling that way for a decade at least. As someone once said, the market can remain foolishly optimistic longer than you can remain solvent (while shorting an over inflated stock).

Never underestimate the power of everyone doing crazy things to make them not crazy. Housing prices in the US have been crazy long enough that the whole system is bought in to these levels it seems. Of course reality could be different in a few weeks or months but the bubble in real estate has been going on for a significant fraction of my adult life.

What do you think it's going to happen to real estate? I'm a bit reluctant to invest in this market.

The situation you described has the potential to wipe off quite a lot of money there as well.

Just find things the government can’t print more of, are desirable to a broad portion of the population, and are resistant to rapid increases in supply in response to demand. Gold, silver, bitcoin, land in desirable places. I also have the normal index funds and certain hand-picked stocks. One issue with stocks is companies can offer more of them in response to demand, unlike land or bitcoin.

We are in a period of rapid inflation but mainstream economists and the government pretend we aren’t. It has been going on for decades but the official inflation rate is supposedly sub-2% while healthcare, education, daycare, high-quality food, housing, and all manner of highly-desirable-yet-cannot-be-easily-created assets have gone way up in price and are unreachable to even the middle class let alone the poor.

Yet many applaud the “heroic” actions of the central banks and government when all they are doing is printing ever more money and patting themselves on the back. We as individuals need to act in our own best interests to avoid this disaster because no one is going to help us.

> We are in a period of rapid inflation but mainstream economists and the government pretend we aren’t. It has been going on for decades but the official inflation rate is supposedly sub-2% while healthcare, education, daycare, high-quality food, housing, and all manner of highly-desirable-yet-cannot-be-easily-created assets have gone way up in price and are unreachable to even the middle class let alone the poor.

Can't agree more. Cheap, imported crap remains cheap and crappy, and everyone pretends that because TVs and egg mcmuffins remain affordable to the common man, therefore inflation is under control. Meanwhile asset prices, healthcare, housing, education (i.e., all the real, actual things important for someone's life that take up the bulk of their income) balloon in price.

I agree with you and would add that cheap imported crap seems to be getting cheaper and crappier. It's pretty astounding just how cheap and crappy things can get and still be salable products.

I think we are at an inflection point. We are about to see an increase in productivity and innovation due to the technologies (AKA tools) that have been created in the last few decades. That has sparked the buying euphoria that has driven many stocks to extra ordinary levels. Is it a bubble? Maybe, we really won't know until after the fact.

I believe that if it is, it's only the start. We will be seeing higher highs for at least a few more years. The euphoria has just started. I believe it so much that I think we will see the 1st Trillionaire with in the next 15 years.

These innovations plus our positive progressive social views will improve the standard of living for many and that in effect will help many others.

Good days are in our future.

There are a variety of comments saying that discount rates are going to 0 because of fed actions which therefore justifies high asset prices. Another version of this story is “the fed printed cash and it has to go somewhere”. While it is true that discount rates are being suppressed by fed action, risk free rates are only one portion of what flows into the discount rate of a DCF. Market risk premium is another component that seems to be completely ignored this HN thread.

The google search term to get your feet wet is “CAPM”. I personally think that risk free rates being 0 is not sufficient to justify some of the valuations we’re seeing in the technology sector.

I came across an article recently which talked about how current accounting standards don't portray an accurate picture of many tech companies due to "intangible assets". I wonder if or how much this shows up in the current feeling of many tech stocks bring overpriced?

https://tanay.substack.com/p/the-rise-of-intangibles-and-the... https://news.ycombinator.com/item?id=25556726

We're probably in a cryptocurrency bubble rather than a tech bubble. Blockchain.com and Crypto.com look like Pets.com.

Unlike the dot-com era, Tesla makes real things.

The valuation is unimportant as long as there isn’t something else for cash rich people to put their money into. Same for BTC or beach property.

Amazon did real things during the dot-com era and that didn't stop it's stock crashing 90%.

Tesla is doing real things and is a great company that I'm sure will be profitable and do well in the future.

Doesn't mean I don't think that it's stock price is still inflated by 10x right now.

> Tesla makes real things.

Well they redefined what full self driving means, that's for sure.

TSLA? Entirely justified. I think we're headed to $4400/share by 2024. (See Cathie Wood's "golden goose" bull case for details.)

I laid out my reasoning for getting in back in May 2020. I raised my position to 86% a month after writing this: https://news.ycombinator.com/item?id=22970810

At this point, pretending that TSLA has anything to do with the company Tesla is grotesque. I applause the length to which you go to justify yourself.

TSLA is a meme stock that operates on a narrative that "TSLA always goes up". It's pure speculation and that bubble is going to pop very badly. And it might take the whole economy with it now that it is in the SP500 with a ridiculous valuation.

I'm sorry you missed out on one of the best investments of the decade, but there is a lot of room left for this to run.

Tesla's coming FSD and robotaxis still haven't been priced in. https://www.youtube.com/watch?v=hx7BXih7zx8

That's not two things, it's one, and I just don't see Tesla self driving panning out anytime soon. They've made wild claims about it for years now, but the actual product has progressed slowly. There have been far more failures than successes in that field over the past decade, and it's perpetually been given a "just a couple more years" timeline.

S&P500 has a total market cap of $31T. Tesla's current piece of that index is ~2%. A bubble pop would be unlikely to "take the whole economy with it" (thankfully).

When Tesla pops, it will potentially lose 80 or 90% of its values over a couple days/weeks. Even though that's only 2% of the SP500, it will trigger a panic sell for related companies in the same industry, and it might eventually become a macro indicator.

How is any lead that TSLA has in battery tech or software not going to be industry standard in 5-10 years? Other companies will hire their engineers etc.

Only advantage they have is branding. Which is good, but companies like BMW have the premium brand down good too.

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