2 Day Losing Streak
Right after we mentioned there was a lot of optimism in markets, we had a 2 day losing streak as the S&P 500 fell 66 basis points on Wednesday. This decline was uniform unlike on Tuesday when small cap value led the decline and large cap tech rallied excluding Apple.
On Wednesday, the small cap value index fell 69 basis points and the Nasdaq 100 fell 84 basis points. Banks were brought down by Wells Fargo which doesnât make sense because itâs an underperformer. Most wouldnât sell banks because the worst of breed bank did poorly. Thatâs like selling Target stock because Macyâs did poorly.
If anything, Wells Fargo doing poorly is good for other banks because they are taking market share from it. Regional banks fell 1.49% and Wells Fargo fell 6%. Itâs impressive that the Russell 2000 only fell 93 basis points and small cap value hung up given the weakness in financials. Small cap value was moderately helped by energy as the sector was up 43 basis points.
For example, Cactus, an energy service company, rose 1.2%. Cloud index fell 1.44%. What a role reversal as energy beat out story stocks. Zoom was down 1.8%. The chart below shows the various changes to the cloud indexes. WisdomTree Cloud Computing fund has done even better as it is up 88% year to date.
Wells Fargo Misses Estimates
In a surprise to no one who follows banks, Wells Fargo had a bad quarter. Has this company had any good quarters in the past few years? Itâs in terminal decline. The firm had 42 cents in EPS which missed estimates by 3 cents. It had $18.86 billion in sales which beat estimates for $17.978 billion.
Net interest income fell 19% to $9.368 billion. Even Wells Fargo, which has been an underperformer for years, lowered the amount set aside for credit losses from $9.5 billion to $769 million which was below estimates for $1.76 billion (a positive).
Mortgage banking income was up from $317 million to $1.6 billion. This gives you an idea of where the banks are if you assume better results from the others. Wells Fargo needs to offer better deals because of its weak reputation. Other banks have stronger net interest margins. They are seeing less credit losses and more mortgage lending.
Plus, there has been an increase in deposits. Itâs not a bad time to be a bank. Make sure to review banks such as Hingham which had a 68% increase in net income per share. Its net interest margin was up 69 basis points from last year to 3.46%. And it had just 23 basis points of non-performing assets. Turns out, itâs a great time to be a bank that doesnât give out many bad loans.
Fastly Crashes After Hours On Weak Guidance
The once popular, Fastly stock fell 4.4% in regular trading and then an additional 25.9% after hours on weak guidance. Basically, firm barely lowered its guidance, but it was priced for perfection, so it cratered. Thatâs why these firms are so risky. One false move and all the gains from the prior few weeks are gone.
Specifically, the firm expects $70 million to $71 million in sales in Q3 compared to prior guidance of $73.5 million to $75.5 million. In the press release, the firm stated, âDue to the impacts of the uncertain geopolitical environment, usage of Fastlyâs platform by its previously disclosed largest customer did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer.â Its biggest customer is TikTok which makes up 12% of its sales.
Insane Multiples
As you should be aware, sell side analysts are not trying to stop the wave of speculation in businesses with poor fundamentals. In fact, they are adding to the momentum. It is entertaining to see what they come up with. Thatâs how unrealistic their assumptions have become.
Craziest one is Goldman Sachsâ Snowflake EPS estimate. They are calling for $1.21 in EPS in the year 2032. Thatâs in over a decade. The idea is that SaaS has such high retention rates that we can predict their cash flows 12 years in the future. This shows how confident investors are in this business model. Itâs a good model, but most investors are not as confident as they are.
Most people would be fine with buying this group anytime from 2015 to 2019. Now, the valuations have gotten absurd. Credit Suisse put a $250 price target on Snowflake which gave it a 79.5 EV to sales multiple. That stock is currently at $243.18. Therefore, it trades at over 200 times 12 year future EPS.
Credit Suisse also did a report on Draftkings for our entertainment. The firm gave the stock a $76 price target which is a pretty big recommendation as it is at $47.56. It fell 7.1% on Wednesday, which means it is now down 25.4% since its record. Penn Gaming is only 9.4% off its record high. Share offering destroyed DraftKingsâ momentum. A $76 price target is based on a 46 EBITDA multiple on results from 2026.
Credit Suisse projects $650 million in EBITDA in 2026. Frankly, it seems like they are coming up with random years to base price targets on. This high valuation is much different from Kindred in Europe which trades at 7.6 times current year EBITDA. It shows how insane the bubble in American sports gambling stocks has gotten.
Conclusion
The stock market fell again on Wednesday, but the optimism isnât gone. It was a weird day where energy actually beat the cloud stocks. That will likely continue on Thursday as Fastly gave very weak guidance. It's tough to tell where energy will go, but the cloud stocks are going to underperform.
With Fastly, the weakness shows the company isnât a true SaaS play. Pretenders are going to be exposed in the next few months as comps get tougher and competition heats up. These high valuations wonât last.
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