Bubble stocks under pressure; What is status on the EV battle?

Bubble stocks under pressure; What is status on the EV battle?

Equities 6 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Bubble stocks and Ark Invest have had a tough year with our bubble stocks basket down 9.8% this year. The sell-off is driven by waning investor sentiment in the most speculative pockets of the market and rising inflation expectations which sooner or later will translate into higher interest rates and thus higher discount rate on future cash flows. This likely path will hit high duration assets such as high growth and bubble stocks. We also take a short look at Volkswagen earnings and their newly published Q1 EV deliveries which is 3x below that of Tesla.


Yesterday, we wrote about how the green transformation theme has suddenly awoke to a new reality of investor doubts and rising inflation expectations potentially pressuring future profitability and growth because higher input costs on commodities directly impact prices on green transformation technology. Vestas made it clear during its Q1 earnings call yesterday that rising commodity prices will mean higher prices on wind turbines.

However, it is not only green transformation stocks that are feeling the heat. Our bubble stocks (companies with aggressive valuations on EV/Sales and negative earnings expectations) basket was down 2.2% yesterday taking year-to-date performance to -9.8% making it the worst performing basket. Investors are essentially getting nervous over equity valuations in a likely rising interest rate environment driven by higher inflation, because for how long can the US 10-year yield stay this low when inflation expectations are running higher?

The bubble stocks are mimicking the ARK Innovation ETF down 11% this year and indicated down again today hitting critical support levels. Bubble stocks have the ultimate duration profile (ultra-long) as their valuations are driven by cash flows far into the future, and since they are mainly equity financed the cost of capital (the discount rate on future cash flows) is driven by the cost of equity component. But with high valuations the implied equity risk premium is low and thus the marginal change in the risk-free rate dominates the marginal change in cost of capital.

Long-term bubble stocks are a bet on exponential technologies as Ark Invest’s founder and CEO Cathie Wood would, but short-term the main risk source is investor sentiment and the risk-free rate. Investors being aggressively are betting on low inflation to set in after the current spike in the inflation rate, and thus short-term the bubble stocks will be mirror image of interest rates. The worst-performing bubble stock this year has been C3.ai hit by insider selling and investors doubting the discounted growth rate.

Saxo's Bubble Stocks equity theme basket

NameDomicileMkt Cap (USD mn.)12M Fwd EPS12M Fwd EV/SalesDiff to PT (%)5yr return (%)
Kuaishou TechnologyChina213,499-0.8516.236.8NA
Sea LtdSingapore140,384-1.2617.324.2NA
Airbnb IncUnited States130,635-1.3128.114.7NA
NIO IncChina94,795-1.5918.054.2NA
Snowflake IncUnited States84,570-0.8771.534.6NA
DoorDash IncUnited States67,743-0.1917.632.4NA
Roku IncUnited States59,111-0.2623.154.6NA
Bilibili IncChina51,601-4.7618.248.9NA
Teladoc Health IncUnited States41,124-0.3020.351.71,346.9
XPeng IncChina37,228-2.4115.083.6NA
Affirm Holdings IncUnited States34,499-0.8939.791.2NA
BeiGene LtdChina34,490-9.7835.824.81,063.9
Unity Software IncUnited States34,299-0.3532.754.2NA
Plug Power IncUnited States32,156-0.1868.1125.01,165.1
Seagen IncUnited States31,016-0.1115.939.0301.9
Cloudflare IncUnited States28,050-0.0846.123.6NA
Splunk IncUnited States27,486-0.2110.862.4149.6
MongoDB IncUnited States25,201-0.9834.138.6NA
Exact Sciences CorpUnited States24,752-1.1413.343.41,769.1
GSX Techedu IncChina24,455-3.3411.8NANA
Farfetch LtdUnited Kingdom23,465-0.6610.342.8NA
DraftKings IncUnited States23,186-1.1626.530.2NA
GDS Holdings LtdChina20,998-0.1518.647.2NA
10X Genomics IncUnited States20,458-0.3238.913.6NA
Argenx SENetherlands19,397-10.72105.218.51,840.4
Alnylam Pharmaceuticals IncUnited States19,214-4.7721.030.1138.8
Ping An Healthcare and Technology Co LtdChina18,942-0.9111.655.0NA
Innovent Biologics IncChina18,305-0.6124.027.8NA
Guardant Health IncUnited States16,826-1.5040.523.7NA
Zai Lab LtdChina15,781-2.5287.513.3NA
Kingsoft Cloud Holdings LtdChina15,710-2.569.652.0NA
Yatsen Holding LtdChina15,665-1.1710.790.3NA
Oak Street Health IncUnited States15,461-0.4611.121.1NA
C3.ai IncUnited States15,370-0.7969.6130.8NA
Bill.com Holdings IncUnited States15,319-0.1957.425.7NA
Canopy Growth CorpCanada15,279-0.9024.228.51,122.7
Appian CorpUnited States15,229-0.4043.334.3NA
Avalara IncUnited States14,770-0.1621.356.1NA
Elastic NVUnited States14,429-0.4420.659.7NA
Cree IncUnited States14,240-0.5921.322.6304.9
Aggregate / median1,565,14121.338.6920.3

Source: Bloomberg and Saxo Group

Source: Saxo Group

How quickly can Volkswagen catch up to Tesla?

Volkswagen has reported Q1 earnings today with revenue showing a 13% growth y/y but decline from Q4 2020. Cash flow generation and EBITDA margin look good, with Volkswagen generating €22bn in free cash flow over the past 12 months, but this figure will likely come down as the pandemic created a unique cost situation that will not repeat. The key metric for long-term investors was the 59,948 deliveries of EVs with 70% going to the European market. This number is 3x below Tesla’s 184,800 deliveries in Q1 and shows that Volkswagen is still a lot behind and the current chip shortage for carmakers is not making things easier as the CEO Diess told the press.

There is also a report out today from Electrek saying based on internal information from Tesla, that Q2 capacity has already been sold out indicating booming demand for Tesla in Q2. For now, the US carmaker is keeping the competition at bay and still reinforcing the narrative of high growth and that it can conquer the future car industry. However, it is worth noting that a big part of the valuation hinges on self-driving car technology that can turn Tesla’s into a self-driving fleet of cars that can also extract entertainment profits. But Elon Musk recently tweeted between the lines, that self-driving technology is much harder than initially anticipated and the current road network is not optimized or designed for computer vision but human vision.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

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

Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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.