Snapchat shows danger of ‘growth traps’ as Bill Ackman warns worse is yet to come

Ackman was far less cryptic when he accused the Fed of being asleep at the wheel and warned of an accident ahead.

“Inflation is out of control. Inflation expectations are getting out of control,” she declared.

“Markets are imploding because investors don’t trust @federalreserve to stop inflation. If the Fed doesn’t do its job, the market will do the Fed’s job, and that’s what’s happening now.

Bill Ackman says the Fed is losing the fight against inflation. Bloomberg

“Current Fed policy and guidance is setting us up for sustained double-digit inflation that can only be averted by a market crash or massive rate hike. That’s why I think there are no buyers of shares.”

Certainly, there weren’t many buyers of Snap shares Tuesday night, and its slide helped drag Wall Street down with it.

But at the risk of sounding terribly old and completely out of the loop, the most surprising thing about Snap’s decline isn’t that it could lose 43 percent of its market cap in one day, but the fact that it could still be worth $21. . billion ($29 billion) at the end of the carnage.

This is a social networking site whose content (the messages and videos that users send) is designed to disappear regularly and has had trouble gaining users, attracting advertisers, and making money.

Snap is still worth $29 billion at the end of the carnage. access point

Based on its first quarterly profit of just $23 million announced in February, Snap is still valued at around 250 times earnings after its implosion. That’s down from 391 times the day before.

While investors may debate the stock’s broader relevance to the market, they were certainly spooked by CEO Evan Spiegel’s warning that the company faces “rising inflation and interest rates, supply chain shortages and labor disruptions.” , platform policy changes, the impact of the war in Ukraine [and] the macroeconomic environment has deteriorated faster and faster than anticipated.”

Shares of ad-reliant social networks tumbled, wiping a total of $165 billion ($233 billion) from the value of Facebook owner Meta, Google owner Alphabet, Twitter and Pinterest.

But Snap’s warning of a sudden deterioration in the US economy will reverberate beyond that, given big declines by retailers last week, including Target and Walmart, which reported profitability was under pressure from rising prices. of costs and the slowdown in spending on goods.

‘Growth traps’ versus ‘value traps’

Still, not everyone is put off by Snap’s historically ugly day.

Bank of America analyst Justin Post cut his financial forecasts and Snap’s price target, but noted the stock now looks cheap, trading at four times 2023 earnings, compared to Snap’s five-year average of 11 times. BoA keeps her “purchase” in stock.

Herein lies one of the great challenges of the tech stock doom unfolding in global markets.

While the stock prices of many of these companies have obviously changed dramatically, their fundamentals often have not; in many cases, user numbers, market share, and underlying tailwinds such as digitization are all intact.

With tech stocks trading well below historical averages, could they now represent good value?

For Ben Inker, co-head of asset allocation at Jeremy Grantham’s investment firm GMO, that’s a temptation to resist.

In his latest quarterly letter, published Tuesday night, he argues that “growth traps” can be even more dangerous than the “value traps” most investors are familiar with.

Inker uses a common definition for growth traps and value traps, describing it as a stock in either category “that disappointed in revenue over the past 12 months and also saw its forecast for future earnings decline.”

Typically, these pitfalls have been associated more with value investors, who focus on undervalued stocks; they fall in love with a stock that seems cheap, only to see it become even cheaper.

But Inker argues that pitfalls are actually more prevalent in the world of growth stocks. “In a typical year, about 30 percent of stocks in the MSCI US Value Index turn out to be value traps, underperforming the index by 9 percent on average.

“But what seems to be somewhat less well known is that growth traps are more common and more painful than their value brethren, with a prevalence of around 37 per cent of the MSCI US Growth Index and a lower performance of 13 per cent in average. .”

In the last 12 months, the growth traps have performed even worse. “[They have] they underperformed the growth universe by 23%, worse than any 10-month period they experienced, even during the bursting of the Internet bubble, and worse than any 10-month period in the 26 years in which that we have the revenue forecast data needed to define growth traps to begin with,” says Inker.

To his credit, he warned about growth traps 10 months ago and steered customers away from them. So while there’s a hint of the victory lap over his latest missive, there’s always one new caveat worth heeding: growth traps aren’t going to go away.

That may sound pretty obvious given the continued pressure on tech stocks. But Inker notes that while long-term earnings growth forecasts for growth stocks have plummeted since the beginning of the year, “those forecasts are as high as they were at the height of the internet bubble in 2000.” “.

Additionally, growth stocks are still trading at a higher than normal premium to growth value stocks. “When growth stocks trade at a higher-than-normal premium to value stocks, the underperformance of growth traps is more extreme,” he says.

“Today, growth is trading about 2.3 standard deviations more expensive than normal relative to value. Absent a near-term collapse in growth stocks relative to the market, we will likely remain vulnerable on this measure for some time.”

Ackman and Burry would agree.

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