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Q4 2021 Market Commentary

January 28, 2022

“At 10x Revenues … What Were You Thinking?”

Nearly 20 years ago, in March of 2002, an interview appeared in Business Week. Scott McNealy, CEO of Sun Microsystems, commented on his company’s stock at the peak of technology valuations two years earlier. (Sometimes, we find it useful to look back in time to compare and contrast the current environment with one that we think has some commonality with today.) But first, we would like to share McNealy’s full quote from that 2002 interview:

 “At 10x revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

Back then, McNealy may not have realized what sheer perfection he laid down in describing what a multiple of 10 times revenue really meant for owners of his company’s stock at $64 per share. So many unrealistic things needed to go right for owners at that price to make any money. And, as we will illustrate, there are pockets of what McNealy pointed to in 2002 going on today.

Disruptive Innovation: No Earnings? No Problem! 

Today, in our opinion, the poster child for what Scott was referring to is an exchange traded fund managed by Cathie Wood. The fund, called the Ark Innovation ETF, trades under the symbol ARKK. The investment strategy of ARKK is as follows:

“The investment seeks long-term growth of capital. The fund is an actively-managed exchange-traded fund (“ETF”) that will invest under normal circumstances primarily (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to the fund’s investment theme of disruptive innovation.”


When you look under the hood at what the fund owns, Wood is clearly looking far into the future for emerging leadership in different sectors today, aka “disruptors.” Here is a sampling from the top 10 holdings: Tesla (which we have written about in these pages before), Zoom Video, Teledoc, Roku and Coinbase, just to name a few. 

Let’s have a more in-depth look at the third largest holding, Teledoc. According to Y-Charts, TDOC is a virtual health provider with a telehealth platform, delivering 24-hour, on-demand healthcare via mobile devices, the Internet, video and phone. It also offers remote patient monitoring programs for chronic care management. Its platform connects members with a network of physicians and behavioral health professionals. Most of the company’s revenue is generated from access fees on a subscription basis (per member, per month). 

As a company, Teledoc’s intentions are to disrupt the traditional healthcare model of in-person physician office visits. A great idea and a pandemic winner, no doubt! Now let’s look into TDOC’s income statement, as distilled by Y-charts:


You may be surprised to know that, since its inception as a public company, TDOC has not been profitable – on either an operating or on a net earnings per share basis – in each calendar year from 2014 to date. However, at its all-time high price on February 8, 2021 of $294.54, its price to sales measure clocked in at 24x revenue. At 24x revenue to get a 24-year payback period, you would have to receive 100% of revenues as dividends for 24 straight years … So much needs to go right for owners of TDOC at that price to make any money on the stock.

At Forza, one of the criteria that we value highly when considering stocks to buy for client accounts is being historically profitable across various economic environments. That gives us a sense that, on a forward-looking basis, the company’s management team will know how to deal with different operating conditions and not only retain profitability but also grow earnings over time. Granted, this is merely one facet of the selection process that we go through to choose stocks for clients but it is near and dear to us. We like companies that make money!