Technology sentiment, Palantir earnings, and discount rates Technology sentiment, Palantir earnings, and discount rates Technology sentiment, Palantir earnings, and discount rates

Technology sentiment, Palantir earnings, and discount rates

Equities 10 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  Technology sentiment is as dark as when the dot-com bubble burst with many companies seeing their stocks decline by 50-90%. We take a look at some of these names, but which are also profitable, because it is during these periods when some of these companies can be bought at good risk-reward levels. We also take a look at Palantir's Q1 earnings release which disappointed on its Q2 revenue outlook sending the shares down in pre-market trading. Finally, we show how equity valuations are impacted from higher interest rates without any change to the underlying business.


Sentiment in technology stocks is plummeting

The tweet last Wednesday by David Sacks that “Investor sentiment in Silicon Valley is the most negative since the dot-com crash” tells you everything you need to know. The decline in high growth non-profitable companies, which we call bubble stocks, has been -69% since the peak in February 2021. Our bubble stocks basket has basically come back to the levels from before the pandemic. For some stocks it has been brutal such as Zoom, Teladoc, PayPal, and Pinterest, and we have seen that crypto related instruments are a high beta expression of liquidity preference and technology sentiment. The higher discount rate on cash flows are not only compressing equity valuations but also changing investors’ time preference demanding break-even faster than before.

Not all technology stocks are created equally with some of these fallen technology stocks actually being profitable. The list below is a list of US-listed stocks which are down more than 50% since 14 February 2021 and have a positive free cash flow yield; the list below is not meant as investment recommendations but highlighting companies with positive free cash flows yields that have been beaten down heavily. While many investors are suffering it is often during these periods of stress where investors can find very attractive long-term opportunities.

  • Teladoc Health (Return: -88.6%, FCF yld: 4.95%)
  • Zoom Video (Return: -77.8%, FCF yld: 5.2%)
  • Pinterest (Return: -73%, FCF yld: 4.6%)
  • PayPal (Return: -72.6%, FCF yld: 5.2%)
  • DocuSign (Return: -71.7%, FCF yld: 3.0%)
  • Bumble (Return: -71%, FCF yld: 3.3%)
  • Alibaba (Return: -66.4%, FCF yld: 8%)
  • Etsy (Return: -63.1%, FCF yld: 4.8%)
  • Baidu (Return: -62.7%, FCF yld: 3.4%)
  • Rackspace (Return: -60.6%, FCF yld: 12.9%)

 

9_PG_1

The list below shows that current constituents in our bubble basket.

NameMkt Cap (USD mn.)12M Fwd EPS12M Fwd EV/SalesDiff to PT (%)5yr return (%)YTD return (%)
Lucid Group Inc30,271-1.0913.297.0NA-52.3
Cellnex Telecom SA29,281-0.1512.457.4228.2-20.3
Rivian Automotive Inc25,929-6.042.7155.0NA-72.2
NU Holdings Ltd/Cayman Islands24,2480.016.096.6NA-44.2
Seagen Inc22,722-2.5810.330.297.4-20.2
MongoDB Inc20,250-0.1815.355.4NA-43.4
SenseTime Group Inc20,062-0.0716.139.7NA-14.5
Unity Software Inc16,971-0.0910.3130.6NA-59.9
BeiGene Ltd16,673-10.486.0116.9288.1-45.6
Argenx SE16,369-17.6051.715.21,650.9-8.4
Alnylam Pharmaceuticals Inc16,280-4.4911.651.8141.9-20.5
Okta Inc16,054-1.068.0112.0336.9-54.3
Brookfield Renewable Corp13,0050.209.98.3NA0.7
Shanghai Junshi Biosciences Co Ltd12,664-1.0926.634.1NA1.3
Bill.com Holdings Inc12,616-0.3713.998.9NA-51.4
Grab Holdings Ltd11,532-0.373.385.6NA-57.8
Plug Power Inc11,221-0.427.4112.6804.9-31.2
Qualtrics International Inc10,4640.036.4101.4NA-49.2
Wolfspeed Inc10,000-0.029.745.7254.9-27.6
Robinhood Markets Inc8,823-1.078.245.2NA-43.0
Novocure Ltd7,653-0.5412.940.6494.9-2.5
SentinelOne Inc7,253-0.7113.089.9NA-48.3
Affirm Holdings Inc7,097-1.823.7143.7NA-75.2
Avalara Inc6,8900.026.857.6NA-39.3
Procore Technologies Inc6,777-0.708.661.0NA-37.5
Kingdee International Software Group Co Ltd6,700-0.057.460.7365.1-36.9
Confluent Inc6,605-0.699.1101.2NA-68.9
Guidewire Software Inc6,450-0.167.144.626.5-32.0
Biohaven Pharmaceutical Holding Co Ltd6,365-6.396.274.8312.7-34.5
Gitlab Inc6,254-0.9112.473.3NA-51.3
Elastic NV6,092-0.255.490.8NA-47.0
10X Genomics Inc5,804-0.797.885.6NA-65.6
Smartsheet Inc5,625-0.596.452.8NA-43.6
Samsara Inc5,625-0.247.8148.9NA-60.7
Monday.com Ltd5,550-2.858.787.8NA-60.0
Ginkgo Bioworks Holdings Inc4,810-0.209.3243.2NA-67.4
Asana Inc4,752-1.248.1112.7NA-66.5
Ascendis Pharma A/S4,730-7.7141.5114.1200.0-38.2
Guardant Health Inc4,008-4.567.3211.2NA-60.7
Intellia Therapeutics Inc3,608-5.7956.5187.3234.5-59.8
Aggregate / median464,0838.786.7271.5-44.9

Palantir down 11% on outlook miss

Palantir is another very popular technology and growth stock that was IPO’ed in late 2020 which has seen it share price collapse to below $10 last Friday from as high as $45 in January 2021. The big data analytics company with prominent US government contracts reported Q1 results that were in line with estimates growing revenue 31% y/y in Q1 and still delivering an operating loss. However, it was the Q2 revenue guidance of $470mn vs est. $487mn that caused investors to sell shares in pre-market taking the shares down by 11%. The operating margin is improving but judging from the market reaction investors want to see it improving faster per our discussion of equity valuation dynamics related to discount rates (see section below).

9_PG_2
Source: Saxo Group

Discount dynamics on equity valuation

The venture capital investor Bill Gurley said in late April that entire generation of entrepreneurs and technology investors will learn equity valuation the hard way and that the “unlearning” process could be painful, surprising and unsettling to many, and that he anticipates denial. Equity valuations like interest rates have had one direction only culminating in late 2020 and early 2021. But with rising interest rates and inflation the entire equity valuation game is changing and investors will demand business models that can break-even faster than before.

To get a sense of what the US interest rate move is doing to equity valuations let us look at a very simplified example. We have a company (no debt and no non-operating assets), growing revenue at 20% p.a. for 10 years with a NOPAT (net operating profit after tax) margin of 20% with a reinvestment rate of 10% per incremental revenue. The equity risk premium is 5% and in the first period the risk-free rate is 0.5% (equivalent to the US 10-year yield in 2020). The present value of those future free cash flows including the terminal value (the present value of continuing value) is $1,359 equating to a 1-year forward free cash flow yield of 1.6%. What happens to this company if everything is unchanged except for the risk-free rate moving from 0.5% to 3.2%? The value of those future cash flows drop to $831 and the equity valuation (1-year free cash flow yield) goes to 2.6%. The drop in equity value is equivalent to 39% for a 2.7%-points move in the risk-free rate which equates to an equity duration of 14x.

Anyone that knows equity valuation dynamics understand the importance of continuing value (terminal value). The dynamic that is amplifying the moves in equity valuation when you have a large correction in technology stocks is that technology investors are beginning to cut their expectations for the long-term outlook for margins and reinvestment rate etc. so the upward move in interest rates are amplified through several factors in the modelling of the present value of future cash flows.

9_PG_3
Source: Saxo Group
9_PG_4
Source: Saxo Group

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.