Bubble stocks down 40%; Apple says demand is weakening Bubble stocks down 40%; Apple says demand is weakening Bubble stocks down 40%; Apple says demand is weakening

Bubble stocks down 40%; Apple says demand is weakening

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Our bubble stocks basket is down 40% from the peak in February and sentiment is now the weakest in more than five years in this segment of the market suggesting investors are changing their risk preference and are beginning to adopt a change in their outlook for long-term interest rates. Inflation and higher interest rates going forward could easily extend the declines in bubble stocks so investors should be careful about how much exposure they have to this group of stocks. We also discuss the news today that Apple is reporting to its suppliers that demand is weakening ahead of the holiday season hinting that inflation is potentially beginning to impact demand.

Ever since our bubble basket (see constituents below) peaked in mid-February, before we had the first wave of higher interest rates and talk about inflation, it has been downhill with yesterday being a brutal session seeing the basket down 6% and 40% from the peak. The narrative fueled rally in bubble stocks, which we define as large companies with negative earnings expectations and EV/sales ratio above 8, have dramatically changed with the outlook for inflation worsening increasing the probability that low interest rates will remain for long. This naturally impacts bubble stocks because they are more interest rate sensitive as we recent wrote about in one of equity notes. In our view bubble stocks could go much further down if interest rates at the long end of the yield curve finally move higher respecting the inflationary outlook.

Source: Bloomberg

Our bubble basket is trading 19% below its 50-week average which is the biggest negative spread since inception in January 2016 suggesting we are entering a new period with a different rhyme in equities. Mega caps, high quality companies, mining and energy, logistics, semiconductors, cyber security themes will continue to do well in environment with higher inflation.

The table below shows the 40 stocks that are in the bubble basket, which will be reviewed in January, and despite the massive selloff the median 12-month forward EV/sales ratio is still 21.3x, and the median year-to-date return is -21%. The best performing stock is Cloudflare which delivers critical software for internet infrastructure such as streaming and load balancing of servers. The worst performing stock has been Yatsen which is a Guangzhou based cosmetics company from China which has not delivered on growth expectations but also caught up in the generally weak sentiment on Chinese equities. Despite the sharp selloff in bubble stocks the median price target remains elevated around 51% above the current prices of these bubble stocks.

NameMkt Cap (USD mn.)12M Fwd EPS12M Fwd EV/SalesDiff to PT (%)5yr return (%)YTD return (%)
Kuaishou Technology213,499-0.8516.256.9NANA
Sea Ltd140,384-1.2617.356.6NA31.5
Airbnb Inc130,635-1.3128.119.3NA11.1
NIO Inc94,795-1.5918.057.0NA-21.4
Snowflake Inc84,570-0.8771.522.8NA10.5
DoorDash Inc67,743-0.1917.646.4NA13.2
Roku Inc59,111-0.2623.187.3NA-37.4
Bilibili Inc51,601-4.7618.269.6NA-27.0
Teladoc Health Inc41,124-0.3020.374.7420.6-53.3
XPeng Inc37,228-2.4115.023.4NA19.4
Affirm Holdings Inc34,499-0.8939.744.1NANA
BeiGene Ltd34,490-9.7835.820.71,040.636.2
Unity Software Inc34,299-0.3532.716.8NA-1.2
Plug Power Inc32,156-0.1868.134.22,467.18.3
Seagen Inc31,016-0.1115.920.1137.3-9.6
Cloudflare Inc28,050-0.0846.136.4NA116.1
Splunk Inc27,486-0.2110.852.1108.1-34.3
MongoDB Inc25,201-0.9834.18.9NA27.3
Exact Sciences Corp24,752-1.1413.361.2474.2-39.4
Gaotu Techedu Inc24,455-3.3411.8NANANA
Farfetch Ltd23,465-0.6610.351.7NA-46.7
DraftKings Inc23,186-1.1626.5105.9NA-32.9
GDS Holdings Ltd20,998-0.1518.651.6434.8-42.9
10X Genomics Inc20,458-0.3238.936.1NA1.9
Argenx SE19,397-10.72105.217.71,656.08.8
Alnylam Pharmaceuticals Inc19,214-4.7721.013.8332.838.4
Ping An Healthcare and Technology Co Ltd18,942-0.9111.695.5NA-71.0
Innovent Biologics Inc18,305-0.6124.042.1NA-17.9
Guardant Health Inc16,826-1.5040.564.4NA-24.2
Zai Lab Ltd15,781-2.5287.5166.4NA-46.5
Kingsoft Cloud Holdings Ltd15,710-2.569.6120.5NA-62.1
Yatsen Holding Ltd15,665-1.1710.754.8NA-85.9
Oak Street Health Inc15,461-0.4611.183.6NA-50.8
C3.ai Inc15,370-0.7969.686.9NA-75.6
Bill.com Holdings Inc15,319-0.1957.445.9NA84.6
Canopy Growth Corp15,279-0.9024.231.612.2-59.3
Appian Corp15,229-0.4043.357.5NA-58.0
Avalara Inc14,770-0.1621.362.9NA-21.0
Elastic NV14,429-0.4420.629.3NA-4.8
Wolfspeed Inc14,240-0.5921.3NANANA
Aggregate / median1,565,14121.351.7427.7-21.2
Source: Bloomberg and Saxo Group

Is Apple demand suggesting inflation is becoming a problem?

For the past year Apple has experienced problems with getting enough semiconductors for its products including the iPhone 13 which was recently cut 10% on production due to supply constraints. But now the technology company is facing a different problem with Apple telling its suppliers that demand is weakening into the holiday season. Apple shares listed in Germany are down 1.7% and some its key suppliers were down 4-11% in the Asia session. While we have little information to go with here it could be an early sign that the current inflationary pressures are beginning to impact demand for higher priced consumer goods including smart phones.

Source: Saxo Group

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