David Einhorn on Tesla, Amazon: 'We expect this bubble to pop'
Billionaire US hedge fund manager David Einhorn has warned that "we have seen this before", as the tech-heavy Nasdaq Composite breached the 6,000 level for the first time overnight, 17 years after it first hit 5,000 at the height of the dot-com era.
The Nasdaq has surged around 12 per cent so far this year, well ahead of the 6.5 per cent rise in the S&P 500, as investors have increasingly piled into tech mega-caps as uncertainty over US President's promised tax cuts, deregulation and higher infrastructure spending has curbed their appetite for bank and industrial stocks.
Apple shares have risen 25 per cent so far this year, as investors bet that the 10th-anniversary iPhone expected later this year will fuel renewed momentum at the firm. Apple, whose share price is trading just a whisker below its all-time high, is now the world's most valuable company, with a market capitalisation of roughly $US750 billion ($995 billion).
Meanwhile, Facebook closed at a new record high of $US146.49 overnight, having surged 28 per cent so far this year, on expectations of sturdy gains in advertising revenue. Alphabet, the parent of Google, also reached to a new record high, as did Microsoft.
Even Amazon, which one analyst downgraded overnight, managed to post a small rally, leavings its share price not far from its all-time high.
Indeed, these top five Nasdaq companies in terms of market cap - Apple, Alphabet, Microsoft, Amazon and Facebook - account of around 40 per cent of the gain in the index this year.
But not everyone is cheering the latest surge in tech stocks. As David Einhorn, tartly noted in his latest quarterly note to investors, "perhaps as the prospects for tax reform have dimmed, the market has regained enthusiasm for profitless companies that aren't at risk of paying taxes."
Indeed, Einhorn gives a detailed analysis of what he calls the "bubble basket", partly to explain why his fund lagged the overall market in the first three months of the year.
His Greenlight Capital fund returned 1.3 per cent in the first quarter of 2017, while the S&P 500 index returned 6.1 per cent.
As he conceded, "it was a difficult quarter to be short the bubble basket and Tesla in particular."
But Einhorn argues that an all-too familiar market pattern is playing out in these "bubble" tech stocks (he excludes Apple from this group, describing it as a "superior company" with a "durable" market position).
"A number of these stocks are back in full-blown momentum mode. Analysts continue to raise "target prices" which the market treats as news."
And there are all the familiar arguments as to why tech stocks should continue to soar.
"The bulls explain that traditional valuation metrics no longer apply to certain stocks. The longs are confident that everyone who holds these stocks understands the dynamic and won't sell either.
"With holders reluctant to sell, the stocks can only go up - seemingly to infinity and beyond. We have seen this before."
That was before a sudden sell-off saw the Nasdaq plunge more than 30 per cent in 10 weeks from its peak on March 10, 2000. It took until March 2015 for the Nasdaq to regain the 5,000 level.
As Einhorn noted: "there was no catalyst that we know of that burst the dot-com bubble in March 2000, and we don't have a particular catalyst in mind.
That said, the top will be the top, and it's hard to predict when it will happen....In due time, we expect these bubbles to pop".
Still, other analysts argue that there is a critical differences between the latest tech rally and the folly of the dot-com era: valuations.
Even after their latest rally, Nasdaq companies are trading at around 28 times their past 12 months of earnings, compared with around 70 times back in March 2000.
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