From Whitney Tilson:
I got quite a few responses to my last email (thank you!), asking people to send me examples of stocks that ended up being good investments on the long side, even when they were trading at 10x revenues AND had at least a $10B market cap. It turns out there are a handful of examples, mostly in the tech sector, so it’s not impossible that a stock could do well from this point – but is certainly highly unlikely, as I’d bet that there are 10x (50x?) more companies that reached the 10x/$10B level and were terrible long investments going forward.
It’s also interesting to note that while the examples below have all done well over time, many declined by 50% or more after they hit 10/10 – in other words, they were great short-term shorts, even if they weren’t good long-term ones. For example, when Amazon hit $50 in 1999, it met the 10/10 criteria – and then doubled to over $100 (split adjusted), but then fell to $7.20 before soaring to today’s level of $184.47. So had you shorted it at $50, you would have made an 86% gain (had you taken the pain to $100 and been clever enough to cover at the bottom). Similarly, after Intuitive Surgical hit the 10/10 level in 2007, it soon dropped by more than 70%. After H&M hit 10/10 in late 1999, it soon fell nearly 60%. When Mastercard hit 10/10 at $320 in mid-2008, it almost immediately fell by more than 50%. Tencent fell by more than 40% after hitting 10/10 in late 2007. Others however have been rocketships and never looked back, such as Google and Baidu.
The first response I want to share is from Porter Stansberry, the source of my 10/10 idea, who clarifies:
I always remind my subscribers that I don’t actually consider such stocks as good shorts individually. In my opinion, over-valuation is a poor screen for attractive shorts. (I prefer overly indebted balance sheets, obsolete products, and best of all, fraudulent business practices.) I use my ‘victim’s list’ — those stocks over $10 billion in market cap and 10x sales — as a gauge of overall market sentiment. When there are more than 10 companies on the list, the market is likely to be frothy. It’s time to be cautious. Back in 2000 the list was as long as my arm… And, at the bottom of 2008, there was only one or two stocks on the list.
Here’s on diligent reader with six examples:
After reading your challenge to identify 10x rev + > 10B MCAP stocks that performed well as investments, I decided to give it a try. I found 6 that either fell within the range or, for all intents and purposes, close to it.
- · American Tower (AMT): In Q4 2005, AMT had over 302M s/o* at a price of $28.33. Revenues for FY2005 were $945M. MCAP was 9.07B and MCAP/Rev was 9.07. Price on Friday (02/10/12) was $63.29. Over 6 ¼ years, CAGR is 13.67% per share.
- · Intuitive Surgical (ISRG): In Q4 2007, ISRG had over 37.8M s/o at a price of $353.00. Revenues for FY2007 were $516M. MCAP was $13.35B and MCAP/Rev was 25.87. Price on Friday (02/10/12) was $490.83. Over 4 ¼ years, CAGR is 8.05% per share.
- · Mastercard (MA): In Q2 2008, MA had over 134M s/o at a price of $320.20. Revenues for FY2007 were $4.07B. MCAP was $43.20B and MCAP/Rev was 10.62. Price on Friday (02/10/12) was $396.14. Over 3 ¾ years, CAGR is 5.12% per share.
- · Public Storage (PSA): In Q3 2008, PSA had over 168M s/o at a price of $102.48. Revenues for FY2008 were $1.72B. MCAP was $17.29B and MCAP/Rev was 10.02. Price on Friday (02/10/12) was $137.71. Over 3 ½ years, CAGR is 8.18% per share.
- · Salesforce.com (CRM): In Q2 2009, CRM had over 121M s/o at a price of $74.43 Revenues for FY2009 were $1.08B. MCAP was $9.02B and MCAP/Rev was 8.38. Price on Friday (02/10/12) was $128.44. Over 2 ½ years, CAGR is 24.1% per share.
- · Google (GOOG): In Q4 2004, GOOG had over 193M s/o at a price of $179.39 Revenues for FY2004 were $3.19B. MCAP was $34.65B and MCAP/Rev was 10.87. Price on Friday (02/10/12) was $605.91. Over 7 ¼ years, CAGR is 18.24% per share.
*Shares outstanding numbers correspond with the date on which revenue is reported for the year, not necessarily the same date that the original market price is quoted. Shares outstanding are not fully diluted, and are used to calculate MCAP value.
You’ll notice that I applied slightly different standards to MA. The original price date and the revenue reported are for two separate years. Anyway, I thought it might be worth noting.
The two top performers of the group were GOOG and AMT. Both substantially outperformed the S&P 500 over the periods given above. ISRG, MA, and PSA yielded positive returns but underperformed. CRM has yielded a sizeable return within the last two and a half years, yet, statistically, I think it’s too early to say whether the overvaluation is firmly deserved. I can say, however, that I wouldn’t have wanted to be on the short side of CRM over those last two and a half years (nor the long side for that matter). I did notice that this was on your short list.
These LNKD and GRPN valuations seem just crazy, though I certainly like the former better than the latter.
Another came up with a handful more:
I can think of a few:
Baidu hit $10 bil in market value in late 2009 at 19 times sales.
Tencent hit 11 bil in market value in late 2007 at 29 times sales.
I don’t do much in U.S. stocks these days, but other examples include Celgene (CELG), Visa (V), Qualcomm (QCOM), GOOG, EBAY.
Despite all this, I don’t think the 10x rev/10 bil cap rule of thumb is a bad one, but it probably depends on sector. I can’t think of a retailer that beat the rule, even SBUX. There are clearly more examples on the tech side.
I thought of a retailer: H&M traded over 10 times sales (w/ a $28 bil cap) for about a second in Dec 99. Frankly, I don’t put much weight behind the H&M example because the only time it traded over 10 times was in late 99. The fact that Starbucks never got anywhere near 10 times is more instructive. This exercise has me all the more convinced LULU is drastically overvalued. And this is coming from someone who isn’t afraid to pay a high multiple.
Another reader also identified Google:
In response to your challenge, I think Google is a good example of a company that meets the short criteria, but ended up being a good investment. Google went public in August of 2004 with a market cap of $23 billion and a share price of $85, by the end of the first trading day, it reached $100 and had a total market cap of $27 billion. Based on LTM revenue (from Jun 03-Jun 04) of $2.26 billion, Google was trading at 10.2x revenue based on its IPO price and 12.0x revenue based on its price at the close of the first trading day. If you had bought Google at $100 per share 7.5 years ago and held it until today at $606, you would have a cumulative return of 506% and an annual return of 27%. Not bad!
Two others also picked up on Intuitive Surgical:
I think there are a few stocks that have done well with >10X sales and > $10B market cap. Intuitive Surgical (ISRG) comes to mind immediately. Stock is close to an all-time high. But then it is a unique company with a dominant market position and no real competition. But it could all change in the next 4-5 years with a lot of small companies such as Titan Medical and Mako Surgical developing competing platforms.
I believe that Intuitive Surgical at the end of 2009 had a market cap around $12 billion with $1 billion of revenue. It’s up nearly 70% since then.
I suppose one could argue that the jury is still out on whether it’ll eventually grow into its multiple and thus be classifiable as a good long-term investment but ISRG is one of the few examples that comes to mind – I agree that’s pretty close to a failsafe short screen.
Another found two other real-estate-related companies (one could argue about this, but I’d put them in a different category):
I am responding to your challenge in 1).
(AVB) AvalonBay Communities, Inc.:
- · Current market cap 12.80B
- · Revenues (ttm) 971m
- · Current stock price is close to the all time peak in 2007
- · Insiders are selling
This company started trading at about 10x revenues around mid 2005. From mid 2005 to today the stock price has been close to a double.
From late 2008 to early 2010 it dipped under the 10x multiple and got as low as 5x. The stock price went from around $147 early 2007 to about $42 early 2009. Taking in consideration Mr. Hanson’s summary below, AVB may have good potential for downside in the near future.
(BXP) Boston Properties is also pretty close to your criteria at 8.3x as is (RHT) Red Hat at 8.6x.
Two others highlighted Amazon:
In 1999 amzn:
Stock traded between $41 and $113
Shares outstanding: 326.753 million
Revenues for FY 1999 were $1.639 billion.
Stock last split september 1999 and amzn fy end is dec 31, so prices do not need adjustment.
Here’s a link to 1999 10K
and 1998 10K:
Amazon.com is another example. In 1999 and early 2000 it traded up to $120 (market cap over $40bn) while its revenue was below $2bn. It now trades at $190 with more than $50bn in revenue. It went down to less than $10 in 2001 but it would have been a decent investment over the 12-year period.