- Stock splits can be deceiving…
- Will we be able to buy pizza with cryptos?
- Are quantum computers a threat to bitcoin?
- How CRISPR affects our DNA
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
But before we get to today’s questions, I wanted to bring something to readers’ attention.
Initial public offerings (IPOs) just aren’t what they used to be…
Over the past few weeks, we’ve been profiling several high-profile IPOs that will take place in the near future.
Airbnb – the “Uber of lodging” – is finally going forward with a long-anticipated IPO. Palantir is a bleeding-edge company that specializes in using artificial intelligence (AI) to extract insight from massive amounts of data. It too has announced its plans to go public.
This is great news. It is long overdue for these companies to go public. And at the right valuation, they would both be great long-term investments.
But here’s the “bad” news. Airbnb and Palantir are both mature, multibillion-dollar companies.
For instance, Airbnb is 12 years old and was valued at $31 billion during its Series F funding round in 2017. As for Palantir? The company is 16 years old. It was recently valued at $20.3 billion.
They can still be great investments. But their “early days” of exponential growth are behind them. And because these companies stayed private, retail investors never had a chance to invest. Venture capitalists and private equity groups reaped all those early returns.
For longtime readers, this will be a familiar topic.
Why is it so hard to invest in exciting companies during their earliest stages of growth? Why has it been so difficult to invest in the “next Amazon” when the company is still young and the best days of growth are still ahead?
It’s not an accident. Venture capitalists and private equity groups have purposefully kept some of the most exciting companies private for as long as possible to keep nearly all of the early gains to themselves. Retail investors – very often – are left with the scraps, if anything at all.
For five years, I’ve been on a mission to change that. And I believe I’ve found the answer.
There are a group of technology companies that still go public early, when the days of exponential growth are still ahead. In that way, they remind me of Amazon, which went public in 1997 with an enterprise value (EV) of less than $500 million.
I call these investments “Penny IPOs.” And they are the closest thing I’ve found to “turning back the clock” to a time when technology companies went public during their early years.
On September 23 at 8 p.m. ET, I’m going to share my research on “Penny IPOs” with the world.
I’ll reveal why they go public so early. I’ll show how retail investors can buy them easily from their online brokerage accounts. And I’ll explain why they can surge hundreds of percent in days or even hours.
If you are serious about investing in early stage technology, then I encourage you to join me on September 23. Go right here for all the details.
Now, our mailbag…
Do stock splits really make stocks “cheaper”?
Let’s begin with a question on the topic of stock splits…
Hi, Jeff! In general, if excellent companies have stock splits, are those stocks typically thought to be good buys after the splits?
– Michael M.
Hi, Michael. Thank you for the timely question. I’m sure this topic is on many readers’ minds given the recent, highly publicized stock splits by Apple and Tesla.
For any readers who missed it, at the end of August, Apple and Tesla underwent a 4-for-1 and 5-for-1 split, respectively. That means anyone who owned one share of AAPL prior to the split now owns four. Owners of Tesla shares have had their number of shares increase fivefold. And the price of each of these stocks was reduced by a proportional amount.
To specifically answer your question, in general, yes, buying into excellent companies after a stock split is known to be a smart thing to do. Research has shown that post-split excess returns, on average, almost 8% in the first year and about 12% over the course of the three years that follow the split.
It has also been proven that the earnings of companies conducting a stock split actually improve above what was originally forecast by Wall Street. This suggests that their management teams know the company is performing better than what is believed by Wall Street.
But because this effect is so well known, it is hard for us to time it. Apple and Tesla are perfect examples. Minutes after both companies released announcements about these stock splits, their stocks raced up. And this was before the splits happened. It was as if all of the expected future gains were already realized.
And one more word of caution.
We should keep in mind that investing in these companies before their splits doesn’t mean we will suddenly own “more” of either company. It doesn’t matter whether we have one share of Tesla at $2,000 or five shares at $400. We still own the same percentage of the company as we did before the split.
Some investors have been “tricked” into thinking that shares of TSLA or AAPL are “cheaper” now at their new respective prices. Or that it is a “great deal” now that it’s trading for a fraction of the price. However, that’s missing the bigger picture…
Stock splits have no bearing on a company’s market capitalization or valuation. And when determining how “cheap” or “expensive” a company is, we need to understand a company’s valuation.
I often use the enterprise value-to-sales ratio to judge this. EV to EBITDA (earnings before interest, taxes, depreciation, and amortization) can also be good for certain companies.
Does the valuation overestimate or underestimate the value of all future cash flows? Does it overestimate or underestimate future sales growth and gross margins?
In the case of Apple, the company has been trading at all-time-high valuations. At an EV/sales ratio of 7, Apple’s current price is equivalent to seven years of sales (not profits).
That’s the highest valuation that Apple has ever had in its own history.
Apple is one of my all-time favorite tech companies, and it still has a bright future ahead of it. I can say much the same for a company like Tesla.
But investing at these elevated, “expensive” valuations is just speculation right now, not investing.
And Apple and Tesla are not alone in this regard…
Five very popular tech stocks right now are on the verge of falling by as much as 92%. This will come as a surprise to many…
I gave a recent interview where I discuss this as well as the current state of the market. I recommend you check out this interview (you can see it here).
Why crypto isn’t a Ponzi scheme…
Next, a reader wants to know more about how digital currencies work…
Digital assets – I have been trying to educate myself financially and have yet to hear a clear explanation of cryptocurrency or digital assets. If a crypto’s value fluctuates, is not backed by anything, and can’t be used to buy a pizza or loan a friend a few “bucks,” just what good is it? How is it not a Ponzi scheme! Please educate me!
– Stuart W.
Hi, Stuart! Thanks for the interesting question. Bitcoin is a digital asset that operates on a secure blockchain, which can act as a store of value. You can then transfer that value to another person anywhere in the world, at any time, in a matter of seconds.
What makes Bitcoin interesting is the blockchain that supports it. The Bitcoin blockchain is a cryptographically secure decentralized ledger. The transactions are immutable. That means they can’t be changed. And no individual or government can influence or change its code.
Your instincts are correct. If a digital asset isn’t backed by anything of value, it looks and feels like a Ponzi scheme. And in fact, there have been many such scams in the cryptocurrency space.
The Securities and Exchange Commission started to get aggressive, going after the worst of them last year and continuing to do so this year. This is a good thing, as we do need to weed out the bad actors from the industry.
And while there are a lot of these bad projects, there are also some really fantastic ones. Some, like stablecoins, are backed by fiat currencies. In that way, their value can be easily determined because it is backed by a U.S. dollar or perhaps by gold. But the digital assets that you are referring to aren’t backed by anything.
These are the majority of cryptocurrencies, and the field of cryptoeconomics has emerged to address this problem… how to value a cryptocurrency that isn’t backed by any assets.
I’ll explain how this works. In general, the price of a coin (cryptocurrency) is determined by how many coins are currently in circulation, how many additional coins will come into circulation, over what time frame, and – here is the really complex part – the value of the overall cryptocurrency to its users.
This is essentially the value of the utility of the cryptocurrency as perceived by those who use it and/or understand its technological value.
In that way, the market is ascribing a value to what it believes the future utility of that cryptocurrency will be to society. And while that might sound odd, uncomfortable, and unconventional, it is actually a valid way to determine the price of a cryptocurrency.
And because high-quality cryptocurrency projects are built on advanced blockchain technology, they are very real and very different than what a Ponzi scheme would look like.
Thanks for the fun question.
Does quantum threaten the security of blockchains?
Next, a reader wants to know more about bitcoin and quantum…
Hi, Jeff! I have two queries regarding Bitcoin. Will the advent of quantum computing compromise the security of Bitcoin wallets, or will they be protected by advanced encryption?
– Ewan L.
Hi, Ewan, and thanks for writing in.
The bitcoin blockchain was designed to be a decentralized, immutable ledger. In other words, it was designed to be immune to classical hacking attempts.
But could a 256-qubit quantum computer “crack” bitcoin? The answer is yes, assuming that the bitcoin blockchain is in its current state. A quantum computer could pose a threat to most blockchain technology and pretty much any form of encrypted data.
There is a lot of nuance, however, in this subject.
For example, proof-of-work blockchain technology is very much at risk of being cracked by quantum computers. However, proof-of-stake blockchain technology is actually more resistant to quantum computers.
And there is one very important thing to remember about blockchain technology. It is software. And like all software, it can be upgraded.
I can tell you that there are private blockchain technology companies right now working on solutions to make blockchains “quantum-resistant” or “quantum-proof.”
There’s even one blockchain project called Quantum Resistant Ledger that has developed its blockchain technology from the ground up to be quantum-resistant.
And as I wrote about recently, the National Institute of Standards and Technology (NIST), a branch of the U.S. Department of Commerce, also launched a competition back in 2016 for the development of quantum-proof cryptography. The target completion date was 2022.
Sixty-nine different cybersecurity teams entered the competition. NIST went through each team’s proposed system and narrowed the field down to 15 teams.
So the industry hasn’t been sitting on the sidelines. After all, if quantum computers pose a threat to bitcoin, they also threaten the encryption that protects our governments, militaries, corporations, and e-commerce websites.
That’s why we’re keeping a close eye on cybersecurity firms that are well-positioned for this massive shift, which will happen over the next couple of years. I’ll closely watch where the key teams working on these new standards for quantum-proof cryptography go.
CRISPR is a powerful tool…
Let’s conclude with a question about how CRISPR interacts with our DNA…
Dear Jeff, I subscribe to your publications. I also enjoy my daily reading of The Bleeding Edge. I’m not looking for personal advice but for education on the issue of gene editing.
I have all four CRISPR companies in my portfolio, as I’m fascinated with genetic editing as a future therapy. One main technical issue is still very ambiguous to me: DNA is present in cells all over our body. This means that editing the DNA locally by CRISPR (inside or outside the body) and reintroducing it to the body should alter the DNA in all our cells. How is the local fix altering the DNA all over?
– Joseph K.
Hi, Joseph. Thanks for your email. I definitely understand your fascination with genetic editing. This is one of the most exciting technological developments out there. Thanks to breakthroughs in genetic editing, we are on the verge of a complete transformation in medical care.
And CRISPR has provided us with an incredible new tool to use. CRISPR is the genetic editing technology that allows us to “edit” our genetic code as if it were software. CRISPR has the potential to correct any “typos” in our DNA that cause disease.
You may have heard reference to CRISPR-Cas9. Cas9 refers to “associated protein 9.” CRISPR-Cas9 has created excitement because it is faster, cheaper, more accurate, and more efficient than previous methods of genetic editing.
CRISPR-Cas9 actually mimics a system in some bacteria. The bacteria can capture DNA bits from invading viruses, which allows the bacteria to “remember” the invaders. If the same virus tries to attack again, the bacteria can target the virus’s DNA and cut it apart to disable it.
CRISPR-Cas9 uses similar processes. First, a “guide” RNA is used to locate the targeted gene. Then CRISPR-Cas9 can cut and remove a section of undesired DNA and replace it with the desired DNA.
The “guide” RNA essentially has the GPS coordinates for the DNA it is designed to edit and will zero in on that part of the genome wherever it finds it. And as CRISPR takes effect, it can disable defective genes, inhibit the formation of proteins, and otherwise eliminate genetic diseases.
Now, to answer your specific question, there is definitely some nuance. It depends on the therapy and the disease that we are trying to cure. In the case of an in vivo therapy where we inject the CRISPR solution directly into one part of the body or an organ, we only intend to edit the cells in that particular area of the body.
The eye is a perfect example. Editing the cells in the eye will create the desired therapeutic outcome to cure a genetically-caused eye disease.
Ex vivo therapeutic approaches are also similar. Let’s take the liver, for example. Scientists would extract a large number of cells, edit those cells, and then inject those cells back into the liver.
The same might be true for cells in our bones. The desire is for those cells to thrive and replicate in the targeted location to deliver the “cure.”
And there is another way. Edits can be made when there is only one cell, before a child is born. That involves something called “germline editing,” and it is controversial for that very reason.
When editing the genomes of early embryos or sex cells, those edits affect every cell in the body of any resulting child as well as any of that child’s descendants. This is different from other types of CRISPR genetic editing, which only affect the person receiving the treatment.
As I’ve written about before, the risks haven’t stopped scientists in China and Russia from experimenting with germline editing, but they have been strongly criticized by the international scientific community. The Chinese scientist, He Jiankui, was even imprisoned.
It’s irresponsible to perform germline editing without extensive clinical trials to determine effectiveness and whether there will be any side effects or harm done to the children.
So it’s important to understand the exact way that this revolutionary technology is being used.
I’ve been writing about CRISPR technology since 2015… And it’s now hitting an inflection point… the point at which we are beginning to see positive results from human trials. We will keep you posted on all major CRISPR breakthroughs going forward.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Editor, The Bleeding Edge
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