“Hell hath no fury like a growth investor scorned.”
— William Congreve (paraphrased)
I started my trading career in Germany, where stocks would tend to get more expensive on profit warnings.
That sounds counterintuitive, but when a European company missed earnings, its stock (back then, at least) would typically fall by less than the estimates.
If a stock price (P) is down, but its earnings (E) are down more, on a P/E basis, the stock has gotten more expensive.
European investors were a forgiving lot at the time: Shareholders would more often than not give management the benefit of the doubt and assume things would get better in a quarter or two.
That was at least partly because, as country-based investors, they didn’t have a lot of options.
Things changed when investing got more international and decisions started being made not by country or sector, but by factor.
Unlike country-based investors, growth-factor investors are an unforgiving bunch. If a stock they hold for long-term growth misses expectations, even in just one quarter, they are likely to sell first and ask questions later.
There are a lot of growth stocks to pick from. There’s no reason to hang around in a questionable one.
As you’d expect, growth stocks get cheaper when they miss estimates.
Cheap for a Reason?
I get the sense that crypto-native investors think DeFi tokens are inexplicably cheap.
If so, the natural assumption is that it's because TradFi investors are not allowed to invest in crypto.
We think that if crypto markets were open to TradFi asset managers, tokens would all be valued like tech stocks.
DeFi protocols are just software, so it’s logical to expect their tokens to be priced like high-multiple software stocks.
But it’s not the tech sector that gets high multiples — it’s the growth factor. A lot of tech stocks, software especially, just happen to be growth stocks.
We want DeFi tokens to have those growth-factor multiples.
But I’m here to tell you, if TradFi investors owned DeFi tokens right now, they’d be selling.
Because earnings are not growing in DeFi.
TVL is down about 12% over the past quarter (in USD terms). And here’s what’s happening with some of the prominent protocols:
So, the space as a whole is slowing, and earnings for DeFi tokens are slowing more.
This may just be a blip or a one-off or early growing pains. I have no idea.
But I can tell you that if TradFi investors suddenly got the green light to invest in crypto, they would not get past these short-term numbers: The P/Es are too high for value investors, and the growth is too low for the growth crowd.
To cite just a couple of examples:
PancakeSwap trades on 13x P/E, but revenue has fallen for three straight months.
Aave, on 90x P/E, has grown TVL 5% since May 2021, but its protocol revenues are down 33%.
There is no momentum to the revenue in DeFi. Earnings are lumpy and seemingly mean-reverting — two things that are sure to make growth investors look elsewhere.
See Anything You Like?
You could argue that the correct comparables for crypto tokens are VC-backed startups, not listed equities.
But, in DeFi at least, the products are more or less fully realized. If they're not growing now, you’ll need a strong thesis on why they will later.
If that thesis is just wider adoption of DeFi over the long-term, there’s no particular reason to be buying the tokens currently on offer.
That would be a bit like buying a Model-T Ford in 1930 with the intention of entering it in a Nascar race in 1960.
Because DeFi is changing so rapidly, you can’t consider any of the current tokens to be long-duration assets.
A few years from now, today’s protocols may look as dated as the 1980s cast of Growing Pains.
Regardless, long-duration assets only get big multiples if they are growing in the near term.
And the growth has to be constant — it doesn’t take much of a blip in the earnings trend to blow up a DCF model.
As per the recent examples of Peloton, Roku and Zoom, a couple of mediocre quarters will cost you your growth multiple (unless you're Tesla).
Meta now trades at a lower multiple than Nucor. Growth investors are getting out, and it may be that the stock won’t stabilize until enough value investors have gotten in.
There are no traditional value investors in crypto to stabilize prices, however.
You may think your DeFi token is generating enough cash flow to qualify as value, but TradFi’s value investors won’t be coming to crypto anytime soon — they are a cautious bunch.
If traditional asset managers get the green light to invest in crypto, it’ll be only the growth investors that consider it.
They won’t be looking to build a new financial system. They’ll be looking to make money.
At the moment, despite all the amazing things being built, they wouldn’t much like what they see.
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