Best buggy stock for 2021: Zoom or Tesla?

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Zoom and Tesla are two hot stocks that are pushing a millionaire at a feverish pace.

In 2020, Zoom shares rose 396%. The catapult was a worldwide pandemic that sparked an unprecedented work-from-home revolution, which became so powerful that it made the company a name as an agent.

In 2020, Tesla shares rose 743%. The catapult was a worldwide pandemic that sparked an unprecedented day-to-day trade revolution, which became so powerful that Elon Musk became the richest man in the world.

Based on their parabolic movements and high valuations, both Zoom and Tesla meet the criteria typically associated with asset bubbles. However, that doesn’t make them very special. In 2021, stocks and bonds are expensive everywhere compared to history.

The key legacy for most investors is to decide what bubbles they should have and what to avoid.

Bubble times

The resumption of bond purchases by the Federal Reserve has kept interest rates down. This eliminates the risk-free rates that investors use to discount future cash flows. As a result, many assets have been increased.

Seth Klarman, a well-respected hedge fund manager, summarized the situation in a letter calling the Financial Times. “With so much stimulation being used, trying to find out if the economy is in recession is like trying to find out if you had a fever after just taking a large dose of aspirin. to accept, ”he wrote. “But like frogs in boiling water, investors are positioning them without recognizing the danger. ”

Investors like Klarman built positions using fundamental analysis to steer records away from risks and toward opportunities. That playbook may still make sense, but it’s out of fashion too. Case in point: the public company ‘s average annual report is downloaded just 28 times just after 10 – K movies, according to one academic paper.

A bad basic review explains a lot of weird things in the market. For example, suddenly there is a huge bull market in non-profit technology stocks.

Another feature that Klarman maintains is monetary policy. It is no coincidence that the bull market in nonprofit technologies began when the Fed greatly increased its balance. As money supplies comply, so will financial assets.

Financial conditions usually tighten during recess. To paraphrase Warren Buffett, when the tide goes out, we see who has been swimming naked. In other words, this is when credit in the economy pulls back, bubbles and deception open, and markets clear.

But that didn’t happen this time. In this recession (the last shadow bar below), the tide went the other way.

Financial situation has never been easier. That’s all you need to have to reason for a bitcoin hike, a SPAC hike, and why it’s just about everything but money going up lately.

Is capital being dissatisfied? Almost certainly.

However, investors still question what to do about it?

Sitting in money is a difficult game to play when that money is forever reduced. That’s why it will be difficult for us all to get through this “Everything Bubble”.

In my opinion, the ‘best’ bubbles I have in 2021 are the ones that have enough room to expand reliable core support to bring things down against risk. As a case study for how to apply these criteria, we can run through a visual analysis comparing the individual configurations for Zoom and Tesla.

Scenario # 1: Flows higher than the base

Academic studies are beginning to confirm what some investors have experienced by now. That is: we live in a ‘tolerant bubble’.

A combination of wise management and marketing has proven to millions of people that it is wise to manage their wealth passively. But passive growth relies on a misconception that an unlimited number of people can invest passively without compromising the efficiency of capital allocation.

In their paper entitled, “Monitoring biased weights: the effects of index price asset prices,” Hao Jiang, Dimitri Vayanos and Lu Zheng present evidence of recent price declines. give your investment passive. According to their research, “Inflows into assets that monitor the S&P 500 index will unfairly raise prices of large capitalist stocks in the index compared to small stock prices. index. ”

Imagine a teacher telling your class that it is okay to copy each other during exams. If most of the class stop learning and most students only make a copy of the person sitting next to them, the class will leave. That metaphor is the simplest way I can think of to describe the long-term risk of passive investment. If it does too much, capital will be dissatisfied, the ‘wisdom of the people’ will be lost, and the economy will be less productive.

Another major problem is passive investment receiving rewards on a regular basis only price movement. So by design, this naturally stimulates bubbles.

In 2020, Tesla became the poster for all that can go right for one company in an “overflowing” market. After A 700% rally, Tesla was added to the S&P 500, which delivered another wave of emergency purchases estimated at around $ 85 billion. For more on that, you can read this Forbes role.

As the S&P 500 drama grew, so did Tesla’s factor image. Notably, his ‘momentum’ score improved. That helped Tesla become a leading player in a series of popular ETFs, including the $ 20 billion ARK Innovation ETF (ARKK).

ARKK
, which is now larger than all other ETFs actively managed together.

There is potential for 2021 to continue as an environment that favors flows over foundations. If so, investors want to have stock with the best factor mix to attract asset streams. Under this scenario, Zoom looks better than Tesla, because Zoom has more future passive flow capacity.

Tesla has already taken the lead in attracting asset streams. It has recently gone from not being on the S&P 500 index at all to becoming the fourth largest member after Apple, Microsoft and Amazon. And in the ARKK ETF, Tesla is already in a tight spot (9.2% weight). What will it get the most before there is a risk management concern?

In terms of factor exposures, Zoom and Tesla are not twins, but they are closely related. Both rank in the top 1% of U.S. stocks for growth and movement, according to Bloomberg data. That means they should attract similar funding streams.

However, in most ETFs, Zoom weighs much less than Tesla. For example, Zoom is currently a 2% weight in ARKK and is not yet a member of the S&P 500.

Even though the Zoom market capitalization is large enough to qualify for the S&P 500, the company is excluded because with its multi-class share structure, the S&P committee does not follow much. If Zoom continues to perform better, however, there will be pressure to introduce it – especially since S&P has already overtaken other two – class listings, such as Berkshire Hathaway and Facebook.

If and when Zoom is released, it may trigger a pre-purchase frenzy, as we’ve seen with Tesla. That’s not something a Zoom investor should stop from happening, but it does offer a meaningful upside-down option.

Scenario # 2: Basic surpassing streams

A different scenario to consider is: what happens if we return to a fundamentally targeted market?

Under this scenario, Zoom and Tesla would likely get both for their aggressive valuations. But my opinion is that the penalty would not be so harsh for Zoom, because Zoom has better bases for going with the high rating.

First, even though both companies are ‘hyper growth’ stories, one is growing much faster than the other.

  • Zoom’s 12-month sales growth is + 262%
  • Tesla’s 12-month sales growth is + 15%

Secondly, as I explained before Forbes article describing Zoom, the video chat company already has a very profitable business model.

  • Zoom has 70% overall margins and 22% operating margins
  • Tesla has 21% overall margins and 7% operating margins

Third, Zoom has a cleaner balance sheet than Tesla.

  • Zoom debt / equity ratio is 9%
  • Tesla’s debt / equity ratio is 221%

Finally, Zoom also has a more focused Head, which is important when trouble strikes.

  • Prior to founding Zoom, CEO Eric Wong worked his way up as an engineer for Webex – a video chat service acquired by Cisco in 2007. In 2010, Wong left to gain experience in video chat to design a better product, which became a Zoom. . Today, Wong is a proven thought leader, running a successful business, in an exciting place that he has long been 100% committed to.
  • Elon Musk is the most talented capital builder on Planet Earth. But his hands are now full as CEO, founder, engineer, and / or consultant of many companies, including: SpaceX, Tesla, SolarCity, Starlink, The Boring Company, Hyperloop, OpenAI, Future of Life Institute, and Neuralink.

In summary, no one can predict the future. But we can all prepare by quickly setting our concerns for a number of possible outcomes. There are two main situations that need to be considered now: (i) asset bubbles getting bigger and (ii) asset bubbles popping up.

Similarly, Zoom looks like a better bubble than Tesla.

Disclosure: I have Zoom and I’m short on Tesla.

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