KeyStone’s Stock Talk Podcast Episode 169

This week we are excited to be introducing a new contributing analyst to the show. Ryan will start with a brief overview of our Special U.S. SaaS / Software Stock Report which we will be releasing next week to our U.S and VIP research clients. Ryan will look at current valuations in Tech, specifically the software segment, and where valuations stand after the crash from a 10-year historical perspective.

Splits are topical right now with Alphabet about do its 20-1 split, and another couple of companies in our coverage Fortinet (FTNT:NASADAQ), the cybersecurity giant and Brookfield Infrastructure (BIP.UN:TSX) conducting splits in the past couple weeks as well as the high profile splits of Apple Inc. (AAPL:NASDAQ) and Tesla Inc. (TSLA:NASDAQ) over the past year – we have fielded a number of questions in this area. Brennan will delve into the splits, perhaps trying to perform them himself, and more appropriately, what they mean for you as an investor.

Finally, in his first segment, Brett will be looking at a cautionary tale in the once high-flying Voyager Digital Ltd. (VOYG:TSX) – cryptocurrency platform that offers a secure way to trade over 100 different crypto assets using its easy-to-use mobile application. From its 2021 highs over $32, the stock has dropped 98% to close this week in the $0.60 range. Brett lets us know what went wrong and where the business which had posted high revenue growth, is at today.


US SaaS Tech Report – Preview

Technology, and particularly Software, has been the hottest area in the stock market over the last decade. As of the end of 2021, information technology was far ahead as the top performing sector on the S&P 500, boasting a 15-year return of nearly 940%, almost double the next best sector (Consumer Defensive at 560%) and far exceeding the S&P 500 average of 356%.

The pandemic highlighted the need for technological innovation as people were shut into their homes, and work, business and social interactions immediately transitioned online. Specific segments of the tech space have captured a substantial share of growth and investor attention such cloud computing, digital transformation, online collaboration, big data, A.I. and automation. Most of these companies saw their share prices boom over recent years.

That is until recently. Generally speaking, a decline of 10% to 20% is considered a correction and above 20% is considered a bear market. Since hitting its peak in November of 2021 the NASDAQ 100 Technology Index is down 35%, equivalent to trillions of dollars of lost value. Many once beloved and seemingly unstoppable stocks like Zoom, Docusign and Netflix have fared far worse with declines in the range of 80% and even juggernaut Amazon has lost more than 40% of its value in just over 6 months.

NASDAQ 100 Technology Index 3 Year Chart

The question is where do these tech stocks go from here? Many of these companies continue to produce strong financial results, growing revenue and cash flow well into the double digits. With most tech stocks down between 30% to 90%  – the question becomes – are we looking at a generational value opportunity or do we have more downside in store.

One metric for valuing high-growth technology stocks is the price-to-sales (P/S) ratio. Although we would prefer to value companies based on earnings and cash flow, many high-flying tech stocks focus on driving revenue growth and lack a meaningful level of profitability.

We compiled data on stocks in the NASDAQ 100 Technology Index to see how today’s valuations compare to historical ranges. For the index as a whole, the average P/S is about 9 times which is down almost by almost half compared to the high of 15.6 times sales and roughly inline with the 10-year average of 8 times.

Within the technology sector, it is software and specifically SAAS (software as a service) companies that have until recently garnered the best stock price returns. As expected, when we focus on the software companies in the index, we see higher valuations with P/S currently at about 12 times compared to the high of 23 times and the 10-year average of 11.6.

NASDAQ 100 Technology Index Average Price-to-Sales Ratio
 Current10 Average10 Max
Full Index8.58.115.6
Software Only11.811.622.6


To put these numbers into context, the average P/S ratio for the S&P 500 is 2.4 times. The valuation on technology and software stocks has compressed substantially but these groups continue to trade at significant premiums to the overall market and moderately above where they have been for most of the last decade.

This is not to say that the recent selloff in technology has not created attractive buying opportunities. Many of the companies that have experienced share price declines of 30% to 90% over the past 6 months continue to produce solid double-digit revenue growth and profitability while providing innovative products and services for which there is a long-term need. A high percentage also have cash rich balance sheets.

The purpose of our special report is to explore these potential opportunities and highlight a selection of high-growth, highly profitable, software / SAAS investment prospects.

From the over 50 stocks in the report which may our initial criteria and on which we provide statistical analysis on past results and forward guidance, we have authored roughly 15 individual reports – a number of which we are monitoring for entry points over the next 3-12 months, 3-4 are buy recommendations at present. There are also 3-4 stocks we see a good long-term buys which one could take partial positions at current levels in with the plan of building a full position over the next 12 months. These are stocks which have faced significant corrections over the past 6-8 months, but we expect to perform well over the next 3-5 years. However, while they may have dropped 35-60%, they were trading at such lofty valuations, another 25-45% drop, particularly in a recessionary environment, it certainly not out of the question.

Overall, from our statistical analysis and qualitative analysis, it appears that this segment of tech was trading at such euphoric valuations, that despite a severe crash in many cases, the valuations are now just approaching the 10-year average, which remains at a significant premium to the market. It is true that a premium is deserve for many of these higher growth, quality businesses, but we caution investors that the segment as a whole, is yet to trade anywhere close to historically discounted of cheap valuations.

Tax loss selling risk, recession risk.


Stock Splits – What are they, and how do they work?

Many large companies have taken advantage of stock splits in recent years such as Tesla (5:1), Apple (4:1), and an upcoming stock split for our clients is Alphabet which will do a 20:1 stock split on July 15. Plus other companies in coverage followed suit such as Brookfield Infrastructure (BIP.UN:TSX) 3:2 and Fortinet’s (FTNT:NASDAQ) 5:1 – so I thought that it would be a good idea to discuss the concept of a stock splits, why they are used, and I will also use a real world example from our coverage to aid the concept.

First off, lets describe what a Stock Split is – A stock split is the opposite of a share consolidation (or a reverse stock split) and happens when a company increases the number of its shares for the primary reason to boost liquidity of a stock or to make it psychologically appear more affordable for smaller investors (because the market price of the stock will go down following the split).

So how does a stock split work and how does it affect investors?

So, for example, using FTNT’s recent 5:1 share split, if I owned 1 share of Fortinet at a price of $65, following the 5:1 split I would now own 5 shares and the price of the stock would automatically be adjusted in the market to $13.00 per share. SOOO as you can see, my initial investment was $65 dollars before the split (where I owned 1 share), and following the stock split, the 5 shares I now have with the stock trading at $13.00 per share also equals the $65 – LEAVING MY INVESTMENT ECONOMICALLY THE SAME and the OVERALL FUNDAMENTAL VALUE OF THE BUSINESS ALSO THE SAME. So just because FTNT’s stock now trades at $13.00 rather than $65.00, it does not mean that the stock is all of a sudden cheaper – the fundamental value of the company remains the exact same.

We could even take the example on FTNT one step further and calculate its P/E valuation multiple before and after the share split… which would end up being the exact same because both the EPS (Net Income/Shares Outstanding) and Price-per-share (Market cap/Shares) will both change by the same amount because the denominator (shares) in both formulas will change by the same amount. Thus leaving the fundamental value of the business the same.

It’s probably worth referencing the article I wrote and published on our blog called “Price Vs. Value” which showcases the difference between the price paid for a stock and the value ACTUALLY received.


Ryan Comments:

Stock splits are done in theory because it is easier for an investor to buy one share of a company trading at $20 rather than $2,000. However, I stress, the stock is by no means any cheaper at $20 than $2,000 following a stock split. The value in terms of an investment in any company does not come down to price. For example, a stock can be cheaper or a better investment trading at $1,000 than one trading at $1.00. Investors need to look at the underlying cash flow of the business, the intrinsic value of the business to determine whether or not they are getting value for each investment dollar you employ.

Example: if the $1.00 stock has $0.01 per share in earnings, it is trading at 100 times earnings. The $1,000 stock has $100 per share in earnings, it trades at 10 time earnings.

The payback period in terms of your dollars invested is 10 in the $1,000 stock versus 100 in the dollar stock. A far better investment choice is their growth rates are similar.

Do not confuse price with value – I gave a speech detailing this concept earlier in the year. Stock splits do not create fundamental value.



Your Stock, Our Take

Voyager Digital (TSE: VOYG) (OTC: VYGVF)

Company Description

Voyager digital is a cryptocurrency exchange with current operations in the United States and potentially in Europe. Cryptocurrency exchanges operate similarly to stock exchanges, but because the industry is in its early stages, there is a significant variance in legitimacy, size, and functions. Voyager runs their exchange through a phone app. An additional and critical role in Voyager’s fall is Voyager lends various crypto assets like Bitcoin or Ethereum and Stablecoins like USDC.

Voyager Digital collapsed to as low as $0.43 on June 28th, from an all-time high of 36.31 which was set just over a year prior on April 5th, 2021, nearly a 99% drop from high to low. There has been a sharp decline over the last month due to the bankruptcy of one of Voyager’s loan counterparties, Three Arrow Capitals causing them to default on the $650 million loan. Now justified fears of Voyager’s bankruptcy are rampant, as well as buyout and restructuring rumours.

So, how did Voyager get to this state of affairs?

The fallout story is one of financial contagion in the cryptocurrency ecosystem.

The easiest way to understand how this occurred is to go over the events that have caused such a decline.

Stage 1: Luna-Terra Collapsed

The Terra-Luna ecosystem collapsed in Mid-May as the algorithmic stable coin UST de-pegged from the US dollar. An algorithmic stable coin’s goal is effectively reproducing a currency, commonly USD, without having an underlying reserve like traditional currencies use to peg. Once the decline starts, stable coin functions create a feedback loop, causing the stable coin and sister coin, Luna in this case to go effectively to zero. Billions in value disappeared in a blink with the collapse of Terra Luna.

As many players, large and small, are leveraged in the interconnected crypto-ecosystem, the overall market declined heavily during the mid-may downfall. Bitcoin fell from the high 30 thousand to the high 20s during this period. But the contagion caused the broader crypto-market to continue falling once more liquidations occurred.

Stage 2: Three Arrows Capital Collapse

Next up on the chopping block is Three Arrows Capital, a long-only crypto hedge fund, in other words, a non-hedged hedgefund. Voyager had lent Three Arrows Capital 15250, roughly $300 million at current prices and $350 million USDC for a rough total of $650 million. The $650 Million represented about a third of loaned assets, a very material amount.

As Three Arrows was a private hedgefund headquartered in Hong Kong, little confirmation is known about the exact values. Three Arrows had an estimated $200 million in holdings of Luna, which were most likely used to obtain leverage as well. Once Luna collapse, although likely on the brink of insolvency, Three arrows was not insolvent yet. They were estimated to be insolvent once Bitcoin hit roughly 24k.

Three Arrows fallout occurred in a rapid collapse of crypto-prices on June 12th. Rumours were widespread about Three Arrows’ insolvency. They were more-or-less confirmed once co-founder Zhu Su tweeted on the 14th, “We are in the process of communicating with relevant parties and fully committed to working this out” no more tweets have been posted since.

Stage 3: Voyager Digital potentially collapsing

On June 22nd, Voyager disclosed their loan to Three Arrows, causing the shares to plummet over 50% in a single day. Previously, on June 17th, Voyager took a loan from Almeda Research, a private company owned by Sam Bankman-Fried, CEO and founder of FTX, one of the largest cryptocurrency exchanges. The revolving loan is $200 million in USD, stable coins, and 15,000 Bitcoin for a rough total of $500 million.

On June 24th, in an attempt to limit a bank-run, Voyager had limited withdrawals to USD 10k daily.

On June 27th, as Three Arrows failed to meet required payments, the loan fell into default, and Three Arrows is reported to have gone into liquidation.

In summary, Luna-Terra and UST collapsed, causing a deleveraging of the market and funds like Three arrows to collapse, which ultimately led to Voyager Digital losing a third of their loaned assets, causing liquidity and solvency issues of their own.

So, What’s next?

 The future of Voyager depends heavily on the amount received from the liquidation of Three Arrows, but it is likely to be very little with respect to the principle.

The worst-case for Voyager holders is that the company defaults, causing all equity to be zero.

Another scenario is Almeda research ,the company which loaned Voyager capital, and currently owns just under 10% of Voyager, buying it out, or even FTX purchasing Voyager for its operations.

The last case, although currently unlikely, is Voyager weathers the storm and remains independent; for this to happen, a sizeable amount of the loan would need to be collected.

The only thing that is almost certain at this point is lawsuits are bound to happen.


At this time, investing in Voyager is a gamble until more is known about what can be collected from Three Arrows.

Even if you have no interest in Voyager or cryptocurrency, Voyager Digital is a case of risk management gone bad. It shows why due diligence on the part of the investor and management is needed.






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