Why this market is starting to look like a ponzi scheme

Why this market is starting to look like a ponzi scheme

When Tesla split its stock five-for-one and then rallied 12 per cent on the day the split shares started trading, I thought the market had reached a new and unsustainable level of nutty. But I was wrong.

Shortly after Tesla’s split, San Mateo, California based data warehousing specialist Snowflake listed.

Last year most of the companies that IPO’d were relatively mature by the standards of Wall Street. Uber’s massive listing was after it had raised tens of billions in private markets, and six years after it first achieved unicorn status in 2013.

By contrast Snowflake entered 2020 having raised $920 million and was ‘valued’ at US$4 billion. Then more strikingly, in February this year, it raised US$478.8 million at a US$12.4 billion valuation.

Shortly after, during the northern hemisphere summer, the company filed for an IPO.  Private equity players were said to be optimistic about a US$20 billion valuation.

Snowflake is profitless. It generated revenue in FY20 (its year end is January) of US$265 million and lost it all as well as another US$349 million. The IPO price was three times higher than the last capital raising round just six months earlier.

The pricing started at US$75-85 per share, was then raised to US$100-110, and it was finally priced at US$120 per share, or US$33 billion – 75 times the current revenue run rate.

Upon listing the share price nearly doubled, trading at more than 130 times revenue and closing its first day as a listed company with a circa US$70 billion market value.

And a multitude of these examples have prompted many investors to variously describe the current market as a ‘joke’, a ‘bubble, a ‘ponzi scheme’, a ‘casino’ and a ‘lottery’.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.