Kass: Beware Of “Pulling Forward” Sales & Profits

Authored by Doug Kass via Seabreeze Partners,

• Also, beware of “first level thinking” and looking at the rear view mirror

• eBay, Netflix, Twitter, Zoom, Microsoft and Apple all have something in common – the “stay at home theme” has likely been discounted and played out

• Leading technology companies will prove to have far more difficult compares in the second half of 2021 and into 2022

• With market caps large and share price elevated – stocks are vulnerable

• I have aggressively shorted the Indices (with emphasis on the Nasdaq), purchased Index puts and initiated an Apple short

Several months ago I cautioned that market bulls should beware of ‘pulling forward‘ sales and profits: 

“Covid-19 and extraordinary bouts of fiscal stimulus have helped the large beat the small. But, a lot of that beat is the “pulling forward” of revenues and operating profits that will make compares difficult in the second half of 2021 and 2022.” 

Reflecting this concern I have two stocks on my Best Ideas List (short) – Peloton and Zoom. See: “Zoom Is Not the Next Amazon“. 

And, this week, based on the same concern I shorted Apple (AAPL) – a stock that was universally applauded in the financial media when the company reported a large top and bottom line beat on Wednesday evening.

Is Fleabay (err… eBay) and Netflix the Canaries in the Coal Mine? 

Lost in the noise is that Fleabay (eBay (EBAY) ), after recent massive growth offered tepid sequential guidance which shocked the street – meaningful evidence that the stay at home thing looks to be played out. One could have interpolated this from Netflix’s (NFLX) results. And, if you even look at Facebook (FB) , the stunning revenue growth was driven much more by price (advertising rates) than actual underlying unit growth. In fact, I think North American user growth was virtually flat again. I am not sure how sustainable it is to keep taking price up as well in this circumstance. My guess would be as people go back to work, the need for online impressions will be less pressing… and the comps start to get really difficult for all these “stay at home” companies. 

Apple, despite protestations is about to have the same challenges. The overnight European news will likely help my short in Apple.  

There is now large risk to the COVID winners. They not only have comp issues, but also the return to normalcy risk — all in the face of massive valuations both in terms of multiples and market capitalizations. For example, a lot of fanfare in the media about Apple’s new $100 billion buyback. But, with a $2.25 trillion market cap, the marginal impact on EPS is now relatively modest compared to when the company initiated an aggressive capital strategy years ago! 

The best example is uber popular Zoom (ZM) which I put on my Best Ideas List (short) in October, 2020 at $568/share. The shares are currently $321! The stock has been hammered over the last six months in the face of massive upward EPS revisions. But even with the large upside revisions the stock has collapsed. Its market cap, nonetheless, remains large. 

Markets smell this out well in advance, especially with multiples where they are. Mr. Market knows (though FIN TV remains lame) that things will get back to normal, people will go back to work and children will return back to school… And, Zoom’s business will collapse. 

After yesterday’s weak report and poor guidance, we can add Twitter (TWTR) to the list, a stock I recently suggested should have been sold in the high $60s. Same issue. I would be a buyer under $55. 

Amazon (AMZN) , by contrast, is in “beast mode” – but something tells me by the time the second half rolls around, results even at Amazon won’t be looking nearly as good (sequentially or year over year). Moreover, the magnitude of the company’s recent successes and market share gains, the more the cries of antitrust, here and over there, are likely. 

Come to think of it… Microsoft (MSFT) was not so hot, either. Same thing, a lot of demand has been pulled forward and sequential and year over year comps will grow tougher. 

Bottom Line 

Market conditions will likely change as the second half of 2021 for technology now looks far more challenging (helping to explain why my largest individual short is now (QQQ) ). 

This is happening at a time in which the most popular large cap tech stocks have elevated market caps and share prices. 

And, if sometime in the second half of this year there is some minor tapering or a further rate rise and slowing fiscal stimulus, Katie may be barring the doors.