Homework – Tesla, Trade Desk, Peloton, Twilio, and the LPPLS Model

Romain/ novembre 3, 2020/ Finance/ 0 comments

The readers of this blog may be more more or less familiar with the log-periodicity power law singularity (LPPLS) model, that anticipated a rupture of the Nasdaq bubble on September 2nd, and that also suggested that the short-term rebound of September-October would end after the October 12th cash session. If you have never heard about that, please check It is All About Fractals – Tech Stocks and the LPPLS Model (Remastered).

Today, we are going to look at recent predictions on popular single names. Those who follow The Swarm Blog twitter feed (@theswarmblog) may have already seen some of them.

Please note that each of them is not a buy or sell recommendation, but just factual elements on technical and fundamental sources of risk for those stocks.

Tesla (TSLA)

No play on words, but this stock is really driving people crazy. Either you love Tesla, or you hate it. To be honest, I got burned trying to short this name in the past, and the truth is many smart investors made losses on Tesla. Probably because there were too many short sellers in the past, i.e. too many investors expecting a crash. Is this time different? Maybe, as the short interest ratio has fallen from 6.6% in August 2019 to a record low level of 1.3%.

I already explained in an older article why the equity valuation of Tesla is disconnected from reality and from its own economic fundamentals (see Ground Control to Major Musk). But things have got worse since that post, as the company is now worth $390 billion (vs $216 billion for Toyota), without any significant change in terms of EV adoption, car sales, and free-cash flow generation.

It is all about passion. The stock has been supported by a small group of investors, including inexperienced retail traders, who believe that “it’s the future” and that you cannot apply traditional valuation metrics. Meanwhile, most bears have capitulated. For those reasons, the stock went out-of-control in August.

However, the LPPLS detected on August 31st that this incredible move was about to end “very soon”:

Since that the date, Tesla has entered a consolidation phase. While bulls might say that lows have become higher since September, bears might argue that highs have become lower. The thing is, prices have become their own fundamentals, meaning that any bad day is a very negative signal as the only support for the stock is the hope of new highs. And since few people dare to short this name, a short squeeze is very unlikely.

In my opinion, the stock can only go higher if all the extraordinary things that have been priced in by the market finally come true.

Trade Desk (TTD)

A typical Nasdaq tech small-mid company with a $26 billion market cap and only $680 million of revenues. Trade Desk offers tools to manage online advertising campaigns. Not necessarily a bad business, but such valuation levels make the stock highly vulnerable to any bad news.

And the worst situation is when a stock becomes vulnerable to its own dynamics. This is what the LPPLS helps us to anticipate:

Conclusion: the simulation run on Trade Desk indicated that a rupture would occur on October 14th. Thus, the fact that the stock dropped by 20% after that should not come as a surprise.

Peloton (PTON)

A fresh IPO and an intriguing company selling workout bikes for indoor cycling or other fitness instruments. The stock has been treated as a “stay-at-home” play since March, leading to a powerful buying frenzy, especially among retail investors.

But today, Peloton is trading at 18 times its sales, a ratio implying that this company has a unique technology or competitive advantage. Is it really the case?

While, the name has been frequently cited on social media, it was interesting to look what our favorite econophysics model had to say about it:

Bingo! The LPPLS model suggested that Peloton would peak on October 16th and this is what happened.

Twilio (TWLO)

This one is a great story. It is a very interesting company from a business perspective. Every person who has been involved in a web or mobile application knows that communication protocols like email or sms are not necessarily easy to handle while being critical for a start-up or any company operating online. For example, as a PHP developer, I can guarantee you that the mail() function would give awful results as many of your emails would be classified as spams. Twilio is addressing that issue, making sure that applications successfully communicate with their users. In other words, it is a “low-level” technology provider.

However, when a stock is trading at 27 times its sales, while the revenue growth rate is declining, maybe it’s time to question the rationality of the move we have seen since 2018. As many people have talked about it recently on social media, and as the stock was going parabolic, I thought that it was worth running the LPPLS model:

The conclusion of the mid-October LPPLS simulation is different this time, as it does not indicate that Twilio has already reached its top. Indeed, the theoretical conclusion is that a bubble may burst in about 159 trading days

Nevertheless, one should remember that the LPPLS model only tries to time an endogenous rupture. Thus, this conclusion is true only all things being equals, meaning that it works only if the market stays calm for at least 159 days, and/or only if Twilio is not affected by any negative specific news. Given its stretched valuation, such a theoretical conclusion should not necessarily be regarded as a screaming buy opportunity.

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