First Stage Investor

Everything Is Falling Except This Group of Companies

Everything Is Falling Except This Group of Companies
By Andy Gordon
Date November 26, 2018

It’s been getting ugly recently. Everything is falling, including tech stocks.

Tech stocks had been outperforming other stocks (until recently). That’s why the Nasdaq’s plunge has been even more dramatic than the S&P 500’s.

You may have concluded that tech’s good long run is coming to an end.

I wouldn’t blame you if you did.

But you’d be wrong.

A particular group of tech companies is doing just fine. Actually, better than fine.

They’ve been crushing it.

It’s Not FAANG

They’re not the usual suspects…

There’s not a FAANG (Facebook, Apple, Amazon, Netflix and Google) stock among them.

The ratios that investors look at – like price to earnings, price to sales and price to free cash flow – are so high now at FAANG companies that they have effectively priced themselves beyond what the market can bear.

Most public tech stocks are in the same situation as FAANG – priced out of the market.

But not all.

A certain cohort of companies is up 22% on average this year (through the end of last month). That’s much better than the Nasdaq’s slight negative return so far this year (as I write).

What are these tech companies?

They’re (relatively) young and fast-growing, and they operate in large and growing markets.

And right now they’re hotter than ever.

Sound familiar?

It should. These companies are similar to the ones we recommend to you. Our picks, however, are at much earlier stages of development.

These companies are late-stage tech startups that had an initial public offering (IPO) this year.

Their shares aren’t cheap. They don’t come close to qualifying as good “value” companies. Their multiples – like price to sales – are pretty high…

But here’s the thing: They are not nearly as high as their older FAANG brethren. And, for the most part, they’re growing their revenue and customer bases at a much faster rate.

But it’s the supply and demand curves that have really boosted their prices. You see, supply is way down. This year had almost 100 fewer IPOs in the U.S. than 2014, which had a high of 275. But public investor demand for these particular tech companies remains high.

Investors still find young, fast-growing tech companies that are NOT priced to perfection attractive.

And the Big Winners Are…

So who are the people who won big by investing in these companies?

That would be the early investors. As happy as the late-stage investors are, just think of how elated the early-stage investors must be.

This is how it should be, of course. They took the bigger chance and the bigger risk. They deserve the (much) higher financial reward.

For early investors, this is the silver lining to the trend of fewer and fewer tech companies joining the public stock exchanges.

The demand for high-growth tech stocks remains strong, boosting the shares of new public tech companies.

I believe this situation is going to persist for at least several more years.

Venture capital will continue to pour into the startup space. Mature startups will continue to delay going public. Massive markets will continue to reward tech companies that solve real problems with rapid growth.

My Message to You

Tech is not dead… or dying. Public stock investors, however, are getting choosier. Enthusiasm has migrated to a younger, more vibrant, higher-upside group of tech companies. That group is a slightly more mature version of the tech companies we invest in at the early pre-IPO stages.

If those investors like their 10% to 25% gains, just think how they’d feel about the 10X to 25X gains we aim for.

Invest early and well,


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