Welcome volatility; Meta is cheaper than IBM; Amazon's results; Hotel, car rental, and flight tips for the Berkshire Hathaway annual meeting; The Hard Sell: Crime and Punishment at an Opioid Startup
1) Wow, what a crazy week for tech giants!
On Wednesday, Alphabet (GOOGL) reported strong results and rose strongly, while PayPal (PYPL) had its worst day ever. Yesterday, Meta Platforms (FB) lost $236 billion in market value, the biggest one-day drop for any U.S. company ever. And this morning, Amazon (AMZN) rose more than 10%, while Snap (SNAP) (which I mentioned favorably in my February 8, 2019 e-mail when it was at $9.10) soared more than 50% after yesterday's 24% crash.
Such head-spinning moves are unsettling for many investors, causing them to trim or sell positions and position their portfolios defensively.
But they should be doing the opposite.
The best way to make money in the markets is to take advantage of other investors' mistakes – and when is that most likely to happen? In a steady, rising market? Or one in which investors are freaking out, whipping stock prices around violently?
The key, of course, is that you must remain calm and rational.
2) For example, in yesterday's e-mail I explained why my colleagues and I are bullish on Meta. My old friend, famed short seller Jim Chanos, apparently agrees, as he tweeted that "$FB is now cheaper than $IBM. That is all."
When I read this, I thought to myself, "No way!" But Jim is right, based on enterprise value (market cap adjusted for net cash or debt) divided by 2021 earnings before interest, taxes, depreciation, and amortization (EV/EBITDA).
Meta's enterprise value as of yesterday's close is $613 billion ($647 billion market cap, minus $48 billion in cash plus $14 billion in "operating lease liabilities," a form of debt). And last year it had $55 billion in EBITDA ($47 billion of operating income plus $8 billion of depreciation and amortization), so the stock today trades at 11.1 times EV/EBITDA.
The same figures for IBM (IBM) are a $172 billion enterprise value and $11.2 billion in EBITDA, for a multiple of 15.4 times.
IBM should trade at a huge discount, not premium, to Meta, given that Meta is one of the greatest businesses of all time and is still growing rapidly, while IBM has been a total value trap for more than two decades. Here's an article I wrote about it in 2002: IBM's Accounting Tricks. And soon after Warren Buffett bought it in 2011, I wrote to him and begged him to sell it, which he eventually did in 2018, replacing it with Apple (AAPL), one of the greatest swaps ever! Lastly, I warned my readers about it in July 2019, January 2020, and January 2021.
3) I'm a bit surprised that Amazon's stock is up so much today, as the fourth quarter was nothing to write home about (see press release here and slides here).
Revenues rose only 9% (10% currency-adjusted), the first time in more than two decades that growth was less than 15%. (In fairness, the year-over-year comparisons are very difficult – the company projected even lower 3% to 8% growth in the first quarter – as Amazon's business exploded during the pandemic. Revenue growth was 20% in 2019, nearly doubled to 38% in 2020, and peaked at 44% in the fourth quarter of 2020 and the first quarter of 2021.)
While net income doubled, this was almost entirely due to a one-time, non-cash gain of $11.8 billion on shares Amazon owns of Rivian Automotive (RIVN). Operating income fell by 50% and operating cash flow declined by 30%.
Investors were heartened, however, by the 17% price increase for Amazon Prime, from $119 to $139 annually, the strong results at Amazon Web Services ("AWS"), which saw a 40% and 48% increase in revenue and operating income, respectively, and a 37% jump in ad revenue.
In summary, Amazon continues to be a juggernaut and remains a strong conviction core holding – along with Berkshire Hathaway (BRK-B), Alphabet, and Meta – in our Empire Stock Investor and Empire Investment Report newsletters.
4) Speaking of Berkshire Hathaway, my colleague Berna Barshay and my former partner Glenn Tongue will be joining me at the annual meeting in Omaha on April 30. Here are some longtime insider tips if you're planning to come...
Hotels can be hard to find and/or very expensive in downtown Omaha, so I suggest looking in nearby Council Bluffs, Iowa, where there are plenty of options.
We booked two rooms (Glenn and I, both due to tradition and because we're cheapskates, always share a room) at the Western Inn, which is only nine miles from the CHI Health Center where the meeting will be held. The total, fully refundable (until three days in advance) cost per room for two nights was only $257.59.
We also rented a mid-size SUV for three days from Budget for $202 using my favorite discount website, AutoSlash.
Alas, there are few bargains for flights. The nonstop Delta flight Berna and I are taking from LaGuardia, arriving at noon on Friday, April 30, is now up to $899 one way, though it's only $226 on American through Charlotte. The story is similar for return flights on Sunday, May 1.
Another option is to fly to Des Moines (a two-hour drive) or Kansas City (two-and-a-half hours) and rent a car. There are various nonstop flights from New York City to Kansas City on that Friday, returning on Sunday, for $200 to $250 round trip.
5) I just finished reading (listening to) the new book about one of the most disgusting businesses ever, opioid pusher Insys Therapeutics: The Hard Sell: Crime and Punishment at an Opioid Startup.
I followed the story closely because my friend Roddy Boyd of the Foundation for Financial Journalism exposed what the company was doing in a series of five articles, starting in April 2015 – yet the company didn't collapse and file for bankruptcy for more than four years!
Here's the New York Times review of the book: They Made the Most of the Opioid Crisis. Until They Didn't. Excerpt:
Even as it has been overshadowed by the coronavirus, the opioid crisis has grown worse. In the most recent 12-month period for which data are available, more than 100,000 Americans – a record number – died of overdoses. Many were killed by fast-acting synthetic opioids like fentanyl, which is found in illegal street drugs and prescription painkillers.
Anyone who has read Empire of Pain, Patrick Radden Keefe's epic exposé of the Sackler family behind Purdue Pharma, is aware of opioid peddlers' dirty hands. But until I read The Hard Sell, about the outrageous behavior of an obscure drug company, I hadn't appreciated the full extent of the filth or the dark stain the opioid sector has left on the entire industry.
The Hard Sell, by the journalist Evan Hughes, is a fast-paced and maddening account of Insys Therapeutics, whose entire business model seemed to hinge on crookedness. (The book is based in part on a 2018 article Hughes wrote for the New York Times Magazine.) Its sole branded product was Subsys, a fentanyl-based liquid that patients sprayed under their tongues. Insys executives went to extraordinary – and at times criminal – lengths to get their addictive and dangerous drug into as many mouths as possible...
The entire opioid business seems to have been awash in these underhanded tactics; as Hughes notes, "Nothing that Insys did was truly new." Indeed, what's most surprising and powerful about The Hard Sell is not one company's criminality – we've grown inured to corporations behaving badly – as much as how institutionalized these practices were across the modern drug industry.
Insys was only a tiny player compared to Purdue Pharma, but its executives will end up in the same circle of hell as the Sacklers. At least they're in jail, whereas the Sacklers have kept their billions of blood money and are free – it's one of the greatest miscarriages of justice of all time...
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.