Where’s the dislike button?
Be warned: some of the following information is not for sensitive readers. In fact, if you’ve owned all these companies over the past year, you may want to report me to the various platforms for offensive content.
Here are the returns over the past year for the US social media stocks: Meta -31%, Twitter -36% and Snap -46%. Having pins stuck in your eyes would’ve been more fun than holding Pinterest — down 71%.
With Twitter all over the news as Elon Musk makes a play to take the company private, I couldn’t help myself this week. Being the voice of reason in a crazy market in 2021 was a painful pursuit but one that was necessary, as it wasn’t difficult to see that valuations had gone a bit crazy. If you were willing to trade the momentum and commit to getting out at a reasonable time without being too greedy, there was plenty of money to be made.
I know, I know. Before you furiously hit the dislike button, you want me to “zoom out” because over the longer term, these stocks always go up. There’ sa lot of merit in this approach, as investing needs a long time horizon for cycles to play out and the cream to rise to the top.
Here are the returns over five years: Twitter +208%(!), Snap +59%, Meta +46%. Pinterest only listed in April 2018 with an IPO price of $19 and a debut price of $23.75, which is what retail investors jumping into the IPO would’ve paid.
Now trading at about $22 per share, Pinterest hasn’t been as useful for investors as it has been for Mrs
Ghost’s classroom inspiration.
Let’s assume that five years ago, you bought an equally weighted basket of Twitter, Snap and Meta (back when it was called Facebook). You couldn’t buy Pinterest as it wasn’t listed at that stage. Your $300 would now be worth around $610, a compound annual growth rate (CAGR) of 15.4%. This is a solid return in dollar terms and you wouldn’t be upset after doubling your money.
Now let’s assume that you ignored Twitter, the one that people love to
point fingers and laugh at. In the interests of diversification and because China is such an exciting place to be, let’s assume you bought the Tencent Holdings American depositary receipt (ADR) on the US market instead. Though you had the foresight to avoid contributing to the extensive bonuses of Naspers/Prosus executives, being able to execute on US over-thecounter markets isn’t easy. That’s why so many just piled into the local Naspers/Prosus structure instead.
The Tencent ADR is up 54% in the past five years. If Twitter was excluded and Tencent included, your $300 would now be worth $459 instead of $610. The CAGR drops to 8.9%. Ouch.
Over five years, the rand has lost about 10% against the dollar. Translating the ex-Twitter basket to a rand CAGR would give an answer of
10.8%. The top 40 over a similar period has returned 9.3% excluding dividends. Be honest: you were expecting much greater outperformance by the global stocks, weren’t you?
Let’s zoom out even further. As I explained in this column last week, there’s usually “an ETF for that” on the US market. The Global X Social Media exchange traded fund was introduced way back in 2011. Today, it holds a basket of 44 stocks with 43.8% of exposure in the US and 33.1% in China. The Asian exposure is much higher once you include South Korea (10.4%) and Japan (5.2%).
If you got in as early as 2011, you’ve obviously crushed the
market, right? Wrong. Since inception, the CAGR on the
ETF is 11.4%. Over the same period, the S&P 500 has returned 12.8%.
This ETF has underperformed the broader US market over the past decade and a bit.
This isn’t a tech-bashing piece, as I hold a healthy allocation of growth stocks in my portfolio. Instead, this is a great example of why valuations are really important even in growth stocks. If you understand that valuation multiples are higher when there is an expectation of growth, then you’ll be comfortable paying higher multiples for growth stocks than value stocks.
If you understand that buying a stock that is “priced for perfection” is a dangerous pursuit that all but guarantees a loss of capital, then you’ll approach growth stocks with the scepticism needed to protect you from buying Pinterest on a revenue multiple of more than 30 times. Right now, the multiple is 5.7 times.
I know, I know. Before you furiously hit the dislike button, you want me to ‘zoom out’ because over the longer term, these stocks always go up