Rachel’s note: This weekend, we’re sharing an essay from our colleague Jeff Brown over at Brownstone Research.
Regular readers will know Jeff’s widely considered America’s No. 1 tech investor. We love sharing his insights to help you get an edge on some of the best tech opportunities out there. And there’s another on Jeff’s radar that we had to share with you today…
Jeff says it’s one of the most important predictions of his career. And it could put you on the path to sharing in $1 billion in tech profits…
Jeff’s revealing all the details on Wednesday, February 10, at 8 p.m. ET. Just go right here to register for free. And be sure to check out Jeff’s dispatch below…
By Jeff Brown, editor, The Bleeding Edge
Tesla (TSLA) had a wild ride last year.
TSLA climbed over 100% from the beginning of 2020 through late February. It then dropped over 50% during the market crash… before recovering and climbing over 1,000% from its low to now.
Longtime readers know I am a fan of the company. As I’ve said before, it’s not a traditional automaker. It’s a leading-edge artificial intelligence company.
In fact, Tesla cars are on the verge of Level 5 autonomy. Level 5 is complete autonomy. That’s where a self-driving car can go anywhere, anytime, regardless of conditions or weather.
Tesla vehicles have driven more than five billion miles on Autopilot. As they drive on Autopilot, these vehicles “learn” to drive better thanks to the billions of miles of data collected. That’s how the company has made so much progress in a short time.
And Level 5 autonomy will enable Tesla’s masterstroke… a fleet of self-driving vehicles in a ride-hailing network similar to Uber or Lyft. Tesla owners will be able to opt-in to this network and send out their vehicle to earn money for them when they aren’t using it.
Knowing all this, what I say next might come as a surprise.
I recommend all readers steer clear of Tesla’s stock…
A Critical Metric
To be clear, Tesla is a great company. And long term, I remain a Tesla bull.
But the stock has gotten ahead of itself. Tesla is now worth more than several other top carmakers combined, with an enterprise value (EV) of about $800 billion.
And Tesla’s EV-to-sales ratio (EV/sales) – a good metric for how “expensive” or “cheap” a technology stock is – is over 28. That means the current price of TSLA is equivalent to 28 years of revenue (not profits).
Tesla has a bright future. But investing at these elevated “expensive” levels isn’t investing… It’s just speculation.
And Tesla isn’t alone in this regard.
There are a number of companies with exciting technology that I would love to add to our portfolio… but the valuation just isn’t where I can feel comfortable recommending it to my readers.
In fact, we’re seeing these kinds of high valuations with newly public companies.
A Growing Problem
Palantir (PLTR) is a great example. Palantir’s business is to take in huge amounts of data, analyze it, and extract key insights. It uses artificial intelligence and machine learning to find patterns and key data points that human analysts would likely overlook. Basically, the company specializes in finding the needle in the haystack.
The technology is incredibly valuable. But Palantir went public at an EV/sales of about 22. And since its initial public offering (IPO) in September, its EV/sales ratio has grown to over 84 at the time of writing.
That’s just not rational for a company that lost $579 million in 2019 alone.
Snowflake (SNOW) is another perfect example. Like Palantir, it also IPO’d in September. I really like Snowflake’s technology; it is a bleeding-edge cloud-computing software company.
In fact, I’d like to recommend it… but I won’t.
SNOW opened at $245, more than double the IPO price of $120. It also means that there was no way for normal investors to pick up shares anywhere between $120 and $245 a share.
And it has continued to run up since. Its current EV/sales ratio is at a mind-boggling 256.
On any negative news or earnings miss, shares are likely to sell off. Investors are nearly guaranteed to lose money when investing at these levels.
In my Near Future Report research, I often tell my subscribers that we’re investing in solid tech stocks that will let us “sleep well at night.”
Do readers think they’d sleep well holding PLTR or SNOW right now?
Retail Investors Missing Out
The problem is widespread. Many recently public companies are trading at unreasonably high valuations…
And it’s cutting retail investors out of some of the largest gains. Unless we were able to invest in pre-IPO shares along with the venture capitalists (VCs) and hedge funds, regular investors simply had no window to get in.
I mentioned Palantir above. In December, its enterprise value was over $50 billion.
The CIA’s venture capital arm, In-Q-Tel, invested $2 million into Palantir back in 2005 in its Series A round. Palantir was worth a mere $5 million at that time.
That means the CIA’s early stake in Palantir (with some estimates accounting for dilution) made roughly 2,500 times its original investment, turning that $2 million into $5 billion.
It’s a similar story with Snowflake. Early investors like Sutter Hill Ventures raked in as much as $12 billion after the IPO. Altimeter Capital brought in $4.4 billion. And Sequoia Capital had a $2.6 billion return.
Don’t get me wrong. It’s great these companies have finally reached the public markets.
And at the right valuation, they could still be good investments.
But it’s frustrating to see the largest gains get eaten up before retail investors even have a chance.
And that’s been my mission over the past few years. How can I bring pre-IPO gains like what VCs enjoy to my readers?
A Special Kind of Opportunity
I’ve spent over five years digging into this question. I’ve looked into early stage biotechnology companies… Regulation Crowdfunding (CF) opportunities… and unique small-caps with incredible potential. That’s led to some of my most recent ventures like Early Stage Trader and Blank Check Speculator.
And that’s why I’d like to invite all my readers to join me for a very special presentation I’ve been putting together. At my Investment Accelerator event, I’ll share my strategy for getting regular investors the kind of returns that normally only private investors and institutions enjoy.
And there, I’ll give all of my readers the opportunity to share in $1 billion of tech stock profits…
I’ll share the specifics on February 10 at 8 p.m. ET. But it’s something I don’t want anyone to miss.
Editor, The Bleeding Edge