Why are so many unprofitable companies the best performing stocks this year?
awealthofcommonsense.comI don’t know much about the stock market outside of throwing any savings I can muster into a vanguard fund, but articles like this remind me of the scene from Silicon Valley where the Pied Piper team is talking about finding a revenue stream.
Their investor, the Mark Cuban caricature, Russ Hanneman butts in and yells at them about the dangers of showing revenue and how it proves you might only be a 2x-er.
"It's not about how much you earn. It's about what you're worth. And who is worth the most? Companies that lose money!"
He goes on to argue that if you don’t show any revenue then the possibilities are left only to the imagination!
Pre-revenue = maybe a 100x-er at some point!
Obviously silly and over simplified, but I do think that there is truth in the humor. Once this company gets its act together, it could shoot to the moon!
Edit: Here's a link to the scene: https://www.youtube.com/watch?v=BzAdXyPYKQo
Here's a thought experiment about a theoretical company that can obtain incredible valuation.
You start out with some money from friends and family, and you use this money to sell $100 bills for $50. Lots of takers.
Soon enough, you go to a VC and show them your revenue stream, and tell them with more capital you can make the margins much better. They hand you a few million, and you start selling more $100 bills for $70 instead. Wow, you're reducing margins and seeing insane sales growth!
A few more investments later and you're selling $100 bills for $95 en masse. You have ads everywhere, your IPO and ICO are coming up. You probably have a few billion in funding from SoftBank.
Your stock price skyrockets because you're THIS CLOSE to showing profitability and if the trend continues you'll be making billions.
You're obviously mocking this whole thing but the fact is that if you can get away with it, you can use that valuation to acquire actual smaller companies and talent and if you're running an online business and acquire a lot of customers (even if selling $100 bills for $95) you'll have huge distribution that you can then sell whatever you come up with next.
Or as they use to say, we lose money on each unit but we'll make it up in volume.
> Or as they use to say, we lose money on each unit but we'll make it up in volume.
I believe this is a joke, no? I.e. you can't lose money on each unit and "make it up in volume."
It's a joke, because the strategy is to undercut or buyout the competition to survive long enough to be the last one standing.
Dude, that's a ponzi scheme with a few extra steps...
...
Ah shit...
Jokes aside, this is also why there are so many "haters" for such companies. A lot are the ones pointing this out since it's clear as day. But hey, people like their high horse. They trade out your classical deity religions for mortal idol cults and act enlightened. Its creepy how tech these days are just cults.
This article from two years ago describes the "75 cent dollar store" as an analogy for MoviePass which is basically the same idea:
https://www.nytimes.com/2018/05/16/technology/moviepass-econ...
This is more or less how PayPal started, yeah.
(When they sold the $100 for $80 they also onboarded them to do other things, once there were enough of them. Eventually they reduced the payout to selling $100 for $95.)
> Their investor, the Mark Cuban caricature, Russ Hanneman
I didn't know that's what they had intended. I never once thought that's what they were going for.
1. The character made money selling "Radio on the Internet" -- Mark Cuban sold Broadcast.com to Yahoo for $5.7B in 1999.
2. The character recounts popping a boner when he saw his net worth cross 1B. There's some old Cuban video about watching his stock price while sitting in his boxers.
3. There's a bit in the show about the character showing both rows of teeth when he smiles. Cuban smiles like that.
Cuban also owns Three Commas[0] and Hanneman makes it very clear how proud he is of being in the "Three Comma Club" [1].
I'm not sure if it was ever explicitly stated by the writers, but IIRC, Russ put "radio on the internet," while Mark Cuban first hit it big with broadcast.com.
I believe they based him off of Mark's big personality too, mocking things like "three commas" and investing in a bunch of stinkers over the last 20 years.
I always thought Russ Hanneman was based on Sean Parker, he had an over the top flashy lifestyle.
I scratched my head too, but I forgot about this detail.
> Russ Hanneman is a multi-billionaire who claims to have "put radio on the internet".
Yeah I thought it was just a bro-VC type person rather than anyone specific
Russ also made his money putting radio on the internet.
> outside of throwing any savings I can muster into a vanguard fund,
I know the popular advice for the last decade has been "stock market always goes up! 8% a year!" but do you really believe it's wise to align your future investment strategy with the general well being of the economic.
I'm not saying don't have a 401k (well if you really press me, I will say that), but if all of your savings are directly tied to the market that means that you are most successful when the rest of the market succeeds, but in the case that the market collapses you also collapse. This is leverage, the opposite of hedging.
It has always seemed strange to me that Wallstreet has convinced American's to treat their retirement as leverage rather than a hedge. If the market is doing fantastic, then it's not as important to have savings, and if the market is doing poorly it's important have other means of economic stability.
> If the market is doing fantastic, then it's not as important to have savings
This makes no sense to me in the context of retirement savings.
You've retired. You aren't capturing part of that market anymore.
The standard wisdom is "switch to lower risk investments as retirement gets closer" which is specifically because the market may turn. But if you're never in the market, you're gonna miss out on a lot of gains before then, unless you're expecting decades straight of poor performance.
I see it as a hedge against inflation. In boom times with soaring markets, there is (usually) considerable inflation. If you ride the market, you probably won't see outsize returns but you won't lose purchasing power to inflation either.
For this reason I frequently wonder whether I should invest HSA funds exclusively in medical stocks. If healthcare gets more expensive, my HSA has probably grown. If healthcare gets cheaper, my HSA might shrink, but that's fine because healthcare is cheap.
> If healthcare gets cheaper, my HSA might shrink, but that's fine because healthcare is cheap.
Isn't the conventional min/max strategy to not use your HSA for any medical expenses? That is, you just treat your HSA as a traditional IRA and don't touch it until 65+.
The funds in the HSA are to be withdrawn to cover medical expenses.
So, you do leave it in the HSA as long as possible- but ultimately it's all going towards medical expenses eventually, otherwise you lose the tax advantage.
After 65+ you can withdraw the funds for any reason without penalty. The so "prevailing wisdom" seems to be to not use the HSA for medical expenses and cover those with after-tax money so your HSA can continue to grow.
Of course, this is predicated on being able to cover medical expenses without your HSA.
At age 65, you can take penalty-free distributions from the HSA for any reason. However, in order to be both tax-free and penalty-free the distribution must be for a qualified medical expense. Withdrawals made for other purposes will be subject to ordinary income taxes. -- https://www.wellesley.edu/sites/default/files/assets/departm...
You don't have to withdraw funds from the HSA at time of billing, however. If you spend $1,000 at the ER today, you can take those $1,000 out twenty years from now.
I was responding specifically to your "otherwise you lose the tax advantage" bit, which is still false. The money still grows with the same tax-advantage as a traditional IRA/401k.
Spending the money on medical expenses at 65 will maximize the value (this actually isn't universally true because IRA/401ks have required minimum distributions which can make holding onto the HSA more valuable), but you still get tax benefits by not covering medical expenses with it as long as you wait until 65+.
I also realized that I meant to say "not use your HSA for any medical expenses pre age 65" in my original comment. Sorry for any confusion.
its neither a hedge nor leverage. It's a place to put your long term money to grow, probably the best place. if by 'Wallstreet' you mean financial advisors, they recommend a mix of assets, not a single asset class in stocks. most people have a mix of stocks, bonds, and real estate.
it use to be 10%, in the late 2000s it got revised to 7%, though many today think it's realistically 5%.
Leverage does have a specific meaning in investing: it means using debt to amplify returns. This means if the market increases by X%, your investments return >X%, and the same in the negative direction. Having the same returns as the market is not leverage.
Well what else do you propose? The whole system is tied to that: pensions, house values, salaries. If you squirrel away your money under you mattress you probably won’t earn enough money in a lifetime to retire off of it. I don’t see an alternative?
The thinking behind this strategy is: there is enormous incentive to make the market perform well, which is why society will make the market perform well, with whatever means necessary. The incentive to make the market fail is much smaller (and even those shorting the market do eventually have an incentive for a well-doing market, because the money they make is worthless if it's not spendable for stuff, which depends on a well-doing market).
You can clearly see this play out right now in terms of current worldwide monetary policy: for the sake of a well-doing market, central banks are printing money like there's no tomorrow.
The sane form of this advice drops the "always" and adds "over sufficiently long time horizons."
That's the key. If you are looking at a horizon of 10 years or more, the stock market has always (with some rare exceptions) gone up. That is to say that if you take a random point in time, and look at the stock market 10 years later, you will have a very hard time finding a point where it didn't go up more than inflation.
If you do this exercise with shorter and shorter time frames, more and more points in time will show a negative return.
This was just a long-winded way of saying that I agree with you. Stock markets are good investments, but your horizon has to be long, and that means at least 10 years.
There is reality to this, but it's generally for private companies raising money that can hold their cards close to their chest.
Pinterest, I believe, would not tell investors the 'results of their ad tests' precisely because they didn't want investors to be able to hard-value the company.
Once the 'analyst in the investor' gets enough data, that mind will crunch the numbers quickly to figure out the 'net present value' etc. and come up with a number.
If they don't have that data, then some of them can be allowed to 'dream'.
With public companies, there should be enough data on the table for people to make reasonable conclusions, but investing is taking a pop-culture angle these days and it's problematic.
WeWork valuations were crazy.
It's hard to see how Palantir is worth much.
Peleton and Tesla should be controversial, but at least the have solid foundations.
Anything with no record has the potential to be the next FANG. It's far clearer for a company that's existed for awhile, what its potential might be. And that insane growth will only be found early on, typically during a time when the company isn't profitable.
>I don’t know much about the stock market outside of throwing any savings I can muster into a vanguard fund.
You have just answered your own question. If enough people make financial decisions based on a specific metric, rather than their own understanding, of course they will be a whole industry of companies trying to game the KPI and make sure your uninformed dollar ends up in their coffers.
What question are you talking about? What is your point exactly?
The point is that blindly copying the investment strategy used by a majority of other players inevitably leads to what some call a bubble.
Stocks are their own product. They have value because people are willing to buy them, which is only incidental to their belief that the value of the underlying company will increase. The price of a stock goes up because people want to buy it.
Absolutely hilarious scene. Made even more funny by how scarily accurate it is XD
"It's the perfect play!"
That show is so on point sometimes.
It is very simple. There are two things happening here. One: the Fed has invested trillions buying everything under the sun (not just t-bills) to prop up the markets and make it look the economy is fine. Two: interest rates are being held artificially low by the Fed and have been for a while. So people are desperate for returns and the only place to get it is equities.
It is a pyramid scheme and must pop someday. Really just depends on how/what/when the Fed does.
You're correct, but I think the "mystery" here is why a basket of unprofitable companies is outperforming broader indices.
Investors are desperate for growth, and the prospect of investing in a company that could 10x in value over a very short span of time is just so tempting.
It might seem outlandish, but there are many startups that have exploded right after IPO recently, so investors are asking themselves, what's the next hot stock, and how can I spot it before its valuation explodes?
Because of perceived future value, and if you had only certain avenues to bet on , then tech would be at the top. Added to that, gamified platforms like Robinhood, where there are a whole bunch of new, inexperienced investors. Robin hood added like 3 million customers in the months after covid.
They're anticipating a greater fool comes along. Foolish retail investors invest in hype.
> One: the Fed has invested trillions buying everything under the sun (not just t-bills) to prop up the markets and make it look the economy is fine.
And ... the predicted response (dollar collapse) has not happened so one can make 2 arguments:
1) if the result you like is the economy working then: Well Done! If the result you want is maximizing the value of dollars then: Bad Fed! Very very bad!
2) given that this hasn't collapsed the value of the dollar, why haven't they done this earlier and given the money to our government to spend on infrastructure ? Clearly we're still in the zone where more loans make the economy go smoother.
USA is all in, expect military to prevent the pop
What will they do, put a gun to consumers’ heads to force them to buy exercise bikes and the latest iPhone models?
Close, but you're missing a step: create new money, give it to Americans so they can afford to buy exercise bikes, put a gun to the head of anyone who dares challenge the US dollar hegemony.
Didn't Germany already try this exact method and fail following their post-WWI sanctions? They had to pay back something like $132 billion gold marks London Schedule of Payments required Germany to pay ~ $132 billion gold marks and issued a bunch of currency leading to hyerinflation? And resentment, populism and nationalism rose and things went pear shaped from there.
They failed because they lost the war.
Not: put a gun to people in other countries heads to force them to sign contracts that are very favorable to the US
Relevant: Map of US Navy "deployed carrier strike groups" in conspicuous locations https://news.usni.org/category/fleet-tracker
USA will negotiate ever more blatantly slanted Trade Agreements backed by sanctions (Russia), regime destabilization (Middle East) etc
You got down-voted, but it's naive to think that's not true.
US and UK did orchestrate a coup to overthrow the democratically elected Prime Minister of Iran in 1953. (Operation Ajax)
The Prime Minister was a lawyer and politician that took control of Iran's oil resources from British Anglo-Iranian Oil Company (What we know as BP today), and he was going to take more actions to take control over their resources.
https://en.wikipedia.org/wiki/1953_Iranian_coup_d%27%C3%A9ta...
This analysis needs to exclude biotech companies like Moderna, otherwise it conflates high market risk companies that are burning money trying to become profitable with companies that are high on R&D risk and are practically forbidden from making money (from the general public) but are guaranteed an exit if the science works out (and will quickly fall to zero if it doesn't).
Given the 5-10 year time frame for devices and 10-20 years for drugs and complex therapeutics, most successful biotech companies IPO after phase 1/2 trials when they have zero revenue (it's illegal for them to charge consumers for anything related to the product until it's approved). Pharmaceutical companies have the benefit of knowing "product-market fit" ahead of time so a successful phase 3 is all but guaranteed a multi-billion dollar acquisition (it even happens at phase 2 for promising candidates). This has been going on for decades with increasing frequency thanks to the pharma industry falling off the small molecule cliff and analyzing these companies in the same group as VC subsidized rideshare or whatever isn't going to yield the best results.
"Almost one in five of these money-losing companies is up 100% or more this year. There are some huge gainers on this list including companies like Overstock.com (+1055%), Tesla (+429%), Peloton (+348%) and Moderna (+285%).
But there are also plenty of big losers of these money-losing firms. More than one-quarter of these stocks are down 10% or more this year while almost 50 names have fallen 30% or more in 2020."
So that explains it pretty well. You're basically making a VC shotgun portfolio out of the stocks with the exact same dynamics - the big winners pull the average way up and offset the large number of middling and poor performers. For a meaningful analysis, you would need to dig into the winning stocks specifically and ask why they're up so much.
> For a meaningful analysis, you would need to dig into the winning stocks specifically and ask why they're up so much.
IMHO rationalization of this is very random at best. Why is Zoom (up >600% YTD) really worth it?
Most of the big tech cos. can replace Zoom overnight. I use Google Meet daily without the trivial bells-n-whistles that Zoom offers. Absolutely no adjustments needed!
Jio in India (where I am from) would eat Zoom very quickly (https://bit.ly/3nSBuRy)
I don't mean to dampen the euphoria but seriously without $ backing, many of these companies are simply difficult to justify. (Valuations will revert to DCF over the long term. But then, in the long term there is no one really alive :-) ... dance along while the music is playing is the mantra ... )
I'd be happy to receive opposing views that are well explained.
> Most of the big tech cos. can replace Zoom overnight.
This ignores the fact that Zoom rose alongside competing offerings from all of the big tech cos. You cite using Google Meet, which has essentially existed (as Hangouts and G+) for all of Zoom's lifetime. Microsoft bought Skype around the time Zoom was founded (edit: and obviously has Teams now). Cisco bought WebEx in 2007. GoToMeeting (Citrix) is older than Zoom.
And that's without counting the transit providers (AT&T, Verizon, Comcast, etc. in the US), who have been doing video chat trials since the late '80s. Again, all big rich companies.
Edit: Amazon has video calling in Alexa & Chime. Facebook has Portal. IBM had Sametime until 2019.
The assumption that the big tech companies can replace Zoom overnight needs to account for the fact that Zoom started in a marketplace crowded by competition from big public companies and should never have achieved traction. Not to compare them directly, but people made similar arguments about Google, which also launched into a crowded marketplace and was "overvalued" etc.
Note: I am not taking a position on Zoom's valuation.
>Most of the big tech cos. can replace Zoom overnight.
If that's true, why haven't they? Streaming live video isn't simple. Multiply that times the number of users in one meeting multiplied by the number of calls, and not simple gets even more complicated. Also, big tech will do the obvious thing and make you be a member/user of their platform. G would require a Gmail account, FB require FB account, etc. The one attraction to Zoom to me is that no account required to attend.
I don't disagree. In a lot of cases, like Zoom, there's a stupid amount of free capital floating around due to effectively-zero interest rates, and not many places with decent returns to invest it. So anything that gets hyped as a good place to put it (like tech stocks) gets blown out of proportion and underlying fundamentals don't really come into play. Basically, investors (and the market) aren't rational right now.
> there's a stupid amount of free capital floating around due to effectively-zero interest rates, and not many places with decent returns to invest it
That's probably the reason, but it would be great if all this liquidity were going to companies that are actually building innovative tech. I mean, we're 20% into the 21st century already, where's my asteroid mining ETF?
I'm with you. I would love to plow investment dollars into SpaceX or Planetary Resources, but it seems like most of the real innovative companies are either still private or got acquired by companies I don't want to invest in.
>Overstock.com (+1055%), Tesla (+429%), Peloton (+348%) and Moderna (+285%)
One of these is not like the others.
I honestly don't understand how a retailer of surplus/returned merchandise that's been around for 21 years is viewed as some sort of growth company. They had one great quarter after a couple years of dismal performance, so what.
Tesla and Peloton are similiar-ish. But Moderna is very different from them all as well.
This story comes up at least every week, plus more often if there is a stock crash, a big or techy IPO, the fed sneezes, or basically anything happens.
The reasons are always the same:
* the fed is printing money
* you buy FUTURE cashflow/price not current ones
* "profit" is taxed, so no company makes it if it can avoid it. That doesn't make their revenue is less than a expenses though (see also using share buy backs to avoid multiple levels of taxation).
* its often better for companies to spend excess cash than to hand it over (and thus let the government take 20 to 60% of it)
* idiots like buying shiney things and that includes shares sometimes
* the market can remain wrong longer than you can afford to be right (see for instance the last 20 plus years)
* if something has dropped 50% then gone up 20%, you'll hear that it's up 20%! In a pandemic/financial crisis/recession/whatever. Not that it's actually down 40% (that's right, 40% not 30%, that's how percentages work).
Wonder what the USG including the Fed do after the election. Could get very dark fast.
I have zero faith in my predictions but... I don't think the free money era will end before the demographics change and boomers stop deciding every election. Until then any government that let's asset prices fall (or even fail to rise fast enough) is toast...
I'm not a business person so I'm mostly using my extrecatory organ for vocalization here, but...
One way to interpret this is that people are betting that losing companies are spending that money acquiring a resource that they can use to generate profit later. The obvious example is growing a giant userbase that will then stick with your product over time. Or it could be building up a bunch of infrastructure to reach a neccesary economy of scale. Hell, it could just be straight up paying lobbyists to buy politicians and do regulatory capture.
The implication from all of this, then, is that these businesses are directly aiming for and/or creating inefficient markets. In an efficient market, it's easy for participants to enter and exit, startup costs are low, and consumers can easily switch products. That means there should be nothing a losing company can buy today that would prevent a future competitor from eating their lunch a few years from now.
The fact that the market rewards losing company shows that there are things companies can buy now that stifle competition and reduce market efficiency in the future. These companies are spending money today to produce a worse market for consumers a few years from now.
That doesn't sound like something we should be thrilled about.
As a former equity analyst, I would say that it's probably better just to ignore this analysis then read too much into it.
The performance of company's stock isn't based solely on whether the company reported a net income it's previous year; it's based on (imo) an ever fluctuating list of metrics, both controlled by the company (i.e. Return on Capital Invested, which net income is a component of) and not controlled by the company (i.e. cost for banks to borrow capital, future growth expectations, current market valuation).
Small speculative unprofitable growth companies outside the major indexes are usually always the best performing stocks, because stocks in the same category are in the list of worst performing too. They have huge volatility.
lol at “small”
Tesla has 10x’d from a year and now at a $420B valuation. That makes it one of the largest companies in the world (I believe top 15)
All the companies that fit in this category like Carvana, Wayfair, Overstock etc are now at $10B-$30B valuations.
Point is these are not small by any means.
Why would you use the market cap as a measure for large when we're discussing overvaluation? It seems like more fundamental measures (revenue, earnings, market share) would be more appropriate.
what does that have to do with my response?
Company size is measured in revenue, not valuation.
Tesla is not small anymore by revenue but it's not in top 100 US companies either.
not sure what that has to do with my response. the claim was that “small” companies can multiply their valuation more easily.
The stock market is not rational, and it never has been, and 2020 is completely unprecedented with many overriding factors.
Interest rates have fallen so the equities market is the only place for returns. Meanwhile the Fed has promised to backstop and keep spending for years if necessary. Add in record amounts of trading from retail investors to institutional funds riding the volatility craze, especially the options market which has outpaced the underlying stock in for several companies, and there's an incredible amount of support for this bubble.
Unprofitable can be good or bad or unknown:
Bad: they dont have product market fit and cannot price at a level that is profitable
Unknown: they do have product market fit and can likely price at a level that is profitable, but choose to underprice to capture market share and grow
Good: They are actually profitable but are re-investing all their profits into internal investment to become even more profitable in the future. example: Amazon for the last 20yrs
But by definition if you invest profits forever you never make any; maybe if you wait long enough you own the entire market and can charge whatever you like then. Is that really actionable though? One stumble and your stock is almost worthless.
If you stop reinvesting profits into R&D, the only other place to put your profit is paying out dividends to shareholders or doing things like buying back stock (which many companies start doing once they reach a point where shareholders will realize more value through dividends than they will from ROI on R&D).
It is a choice nevertheless. As a business owner, you have the freedom to go this route. As a public company, you also have the freedom to go this route as long as the board/shareholders agree (as they did in Amazon's case.)
If a business owner wants to re-invest for growth and shareholders agree I do not see an issue. Without that, we would never have Amazon, FB, MSFT, or almost any large company (whatever you think of these companies aside)
As an Engineer, I think re-investment is awesome. Compare this to the old mentality of squeezing a company until it has no blood left (as Private Equity companies often do.) As long as the company is profitable and re-investing, this is a huge net value to society IMHO.
Everyone thinks the stock market is crazy.
The government is crazy - printing trillions of dollars this year, plans to print trillions more. The currency is will be devalued, inflation will happen. Investors see that and are getting out of cash and into stocks/crypto/property.
So is the market really up, or is it just the outlook on the dollar is down?
I'm not sure the recent evidence bears out this point. If you look at the strength of the dollar, it's actually UP since the ultra-low interest rates that started after the financial crises. Rampant inflation hasn't happened either.
I'm not smart enough to know if this is just a looming bow-wave or that the previous assumptions don't hold.
Up compared to what? That's the key. The money printing is roughly synced between central banks (Europe is actually printing more), so the dollar is up relative to other currencies (since other countries have external debts in dollars and have a need for dollars).
If you look at dollars versus assets, gold, bitcoin, real estate - it's pretty clear that the dollar has lost significantly (it's just not obvious because all physical currency has depreciated in tandem)
The inflation that is happening is not happening in daily commodities - it's happening in the capital markets instead.
Yes, good point. It was implied that the dollar is up compared to other currencies.
I'm not sure gold, bitcoin, and real estate are great comparisons because they are too volatile to use as a real currency benchmark. Real-estate and gold have intrinsic value, I'm not sure how to divorce that for an apples-to-apples comparison to fiat currency.
>The inflation that is happening is not happening in daily commodities - it's happening in the capital markets instead.
I'm curious on your perspective with this. I was under the (maybe wrong) assumption that central banks are more concerned with controlling inflation for commodities...i.e., those things in the CPI rather than stocks. Do you think it should matter to them if capital markets are inflated? Real instability happens when people can't buy bread not when they can't buy $AAPL
The article quotes Ben Thompson (yes, from Stratechery) to explain why unprofitable stocks are performing well. It is basically what you might expect (they are re-investing profits in growth).
For those who wonder how you tell the good unprofitable companies from the bad unprofitable companies: typically you look at gross margins -- or unit economics. This is a little complicated to estimate for any sticky subscription company -- like a SaaS company -- you need to estimate the LTV and discount down to get the true gross margins.
Thompson's point is that a sticky subscription company can have enormous LTV.
The SaaS business model is just such a growth machine. If you have limited churn, expansion with existing customers, and sustained high growth you're going to be making a lot of money down the road. There's just so much lifetime value from SaaS customers and although the initial revenue is low per customer, it snowballs over time as more and more customers are added and services expanded. $CRM is a prime example of this phenomena.
It's also hard to use traditional metrics like EBITDA in a fast growing, expanding SaaS company. So much is based on future growth and revenues and getting over that hump to where the business becomes a raging cash geyser. Some will make it and some will not. But no one really knows who will make it and where they'll tap out today. For all we know many of these companies are unbelievably undervalued.
Additionally, I think there's a belief that there will be consolidation and many of these SaaS companies will be acquired. This has happened to an extent. Hell, the Mulesoft acquisition looks like a bargain today.
It's psychology-fueled. Also, a lot of companies reinvest profit so they don't have to pay taxes.
Don't they use accounting tricks these days so they can keep their cash and then carry it to the stock market? This has the double advantage to keep the stock market inflated and compared to R&D where you risk product failure, the stock market is backstopped by the government and risk-free.
That's why we don't have flying cars. Instead of investment in core competencies we invest in the market.
We have flying cars. They are called Helicopters.
You should take an intro flight lesson at a flight school. There's no way the majority of people could safely fly a personal aircraft in all weather conditions. Flying cars will have to be 100% dependent on a really good autopilot which hasn't been developed yet (which I guess is sort of the point you're trying to make).
Have you SEEN the way most people drive?
Ugh flying cars would require a whole different level of infrastructure to protect pedestrians and property from idiots/malignants in vehicles. We already have giant cement blocks and metal poles everywhere, now we need human-permeable cages.
We don't have flying cars because it's a silly concept.
>companies reinvest profit
There central company to the article’s point (Snowflake) has no profit to reinvest
it does actually, when you reinvest profit you don't make any profit.
They reinvest the money before it could become profit, mostly by hiring more sales
Depends on what do you mean by "reinvest". If you have $1b in profits and build a $1bn factory you still have to pay almost the same taxes.
If you increase payroll in the current year by $1bn you won't make a profit and you won't pay taxes... but it may not be as good an investment.
Isn’t that exactly what the article is claiming they should do? Investing in sales and marketing now to drive future annuities isn’t the same strategy as reinvesting profits to dodge taxes as the OP claims
is it fair to say that investors see more return through reinvestment rather than distributions? Reinvestment sees 100% of the capital, but distributions are at best 75%? Assumptions are that the reinvestment creates value fairly quickly and drives the stock price up.
The company could also distribute profits to investors repurchasing shares.
The stock market price != value of the company. Stock market price == PERCEIVED value of a company. All the stock market does is try and find a equilibrium between parties that want to sell a stock and parties that want to buy a stock. That is it. It doesn't do anything more. You could have a company that is bleeding money month-after-month, is foretasted to never make a profit ever, but if there are more parties (for whatever reason) that want to buy the stock than those who want to sell then the price will go up. The actual financial health of a company is utterly meaningless, the only thing that matters is what investors think of company.
> The stock market does price != value of the company. Stock market price == PERCEIVED value of a company.
No it is not, it is the price some investors are willing to buy at, which when the market is rational and there is no bubble is probably the perceived value
You are arguing over semantics...we are saying the same thing. The price some investors are willing to buy it at, or you could say, the price some investors perceive to be valuable.
I said this in another thread, and I think it's apt here.
If you have high growth, you can lose a lot of money and still have a good story.
If you make some money, but don't have high growth, then you can't tell nearly as compelling of a story.
Effectively, investors are assuming eventual profitability is inevitable, and measuring growth.
The 90s showed that's fair... sometimes. But definitely lets pathological corporate liars with juiced metrics slip through too.
I’m not sure it’s about growth. Based on YCharts, it seems like Tesla’s revenue growth stalled after Sep 2018. https://ycharts.com/companies/TSLA/revenues
It's hard to see in that chart because of the big peak in the 4th quarter of 2018, but year over year growth per quarter is generally improving. The annual revenue chart shows the trend more clearly: https://ycharts.com/companies/TSLA/revenues_annual
Name a high growth company that grew to scale but didn't turn profitable? Uber? That still worked out
Medium
There’s just too much money flowing around. Just the other day I read that Tim Cook managed to double both revenue and profits. Stock value increased more than five-fold.
The stock market is bloated. It will be interesting how we will get out of that again.
I'm surprised that Overstock is simultaneously still running at a loss and is seeing rising share values.
Every time I've tried to shop there, I've found a terrible selection, middling prices, and a mediocre UI. (To be fair, every e-commerce giant has a mediocre UI.) I see them casually mentioned in lists of "Amazon alternatives", but I've never once had someone recommend Overstock for a specific purchase. I don't think I've even talked to anyone who actually buys there.
Are they growing gangbusters in some niche I'm not aware of?
Overstock is not running at a loss (anymore). They doubled their revenue year over year and went from losing money to making money. I imagine that is why their stock is up, though I couldn't comment on why its up by 1000%.
https://www.marketwatch.com/investing/stock/ostk/financials/...
They've also heavily pivoted into tech in the past several years I think:
https://money.cnn.com/2018/08/10/technology/overstock-blockc...
>Almost one in five of these money-losing companies is up 100% or more this year. There are some huge gainers on this list including companies like Overstock.com (+1055%), Tesla (+429%), Peloton (+348%) and Moderna (+285%).
Peloton was a great idea with equally good execution and everyone being stuck at home has only increased its value proposition.
Moderna is one of the leading companies in the pursuit for a COVID-19 vaccine, at least allegedly so.
Tesla is Tesla. EV megatrend yada yada
I don't know the first thing about Overstock.com to be able to opine one way or another
The volatility of the market makes for easy profits. Did an excercise on marketwatch in school one time. I traded random symbols that met my criteria and made a fat virtual profit. I kept it going after the experiment and realized the only reason I did well was because of the variability of that time for the market. I would kill to have some extra cash to invest right now/3 months ago, panicked laymen make investing easy.
Did this work for a relatively long term? The general sentiment is lots of strategies work during bull markets but then get crushed by volatility in bear markets since the drawdown tends to be higher
This is a topic as old as time. I never get why people “complain” about what other people pay for things at a price they themself seem silly. It doesn’t impact you. It’s their money. If they feel they can have an advantage in the long term investing in companies at a high valuation, then sure
Everything thinks what they’re building is worth a lot of money but get jealous when they see high valuations from others :)
The possibility that a lot of that investment might be coming from pension funds or from government-insured banks is concerning.
I wish more companies would separate the cost of _current revenue_ vs the growth investment of future revenue. I.e. Say it cost 30M to generate 100M, and 150M was invested in R&D and future sales. Even though it has negative revenue (100 - 150 - 30), the products that were sold are clearly profitable. Which imho is very different than saying the company is losing 80M a year.
If they are growing rapidly then that would be the primary issue.
Secondarily is a new kind of emotional injection from a wave of new retail investors. This happened in the .com when retail started in earnest with online trading.
And of course 'a kind of inflation'. The Fed is printing money like no tommorow, there's more money chasing fewer deals, very low interest rates. See: home prices.
Because the stock market is only secondarily connected to reality. It's primary function is as a mood ring for the collective mass of wealthy people. Wealthy people get a fetish for something and stocks go up. Right now they have a fetish for companies that lose five times their revenue while growing 500 percent a year.
"So the fear-mongering about companies with huge losses driving the stock market is misplaced"
Um... no. It would be great if you would come back to this article in 2 years time and run the same analysis on the same companies. I suspect the statement above will be rather invalid.
Put another way (by Jim Cramer):
For data warehouse plays, revenue growth + profit margin should be > 40.
In other words, you can focus on high sales growth to plan for future profits, but if your sales growth is lagging you should be turning good profits now.
My guess is that companies dumping have an advantage over legit companies, and they're growing much quicker when nobody is spending on normal companies anymore.
It's the inflated demand created by retail traders sitting at home . Most of them invested in the companies highly active in the media like TSLA, ZOOM etc.
Stocks are not supposed to necessarily value what a company is worth today, they are supposed to be speculative of what the company will be worth in the future.
The ads on that site made me give up on the article.
Also I see the stock market as a train that will take me through the dark tunnel of the inflation caused by printing all the recent money.
The US does not print inflationary dollars. It prints borrowed dollars. This is a subtle but important distinction and is why we don't see substantial inflation now, and won't in the future.
I see, it makes sense. Never thought of that, thanks!
When we're printing trillions of dollars, you gotta put your money somewhere or you'll get negative returns.
Profit is not a very useful parameter for assessing a young company in growth mode with a good product.
Because their owners believe it is their last chance?
The market is jostling with too much magicked money?
Because of FED's QE
Don't most of these companies stand to benefit enormously from long term changes people think the pandemic will bring?
Telsa benefits from any environmentally stimulus.
Peloton benefits if we all move to more rural areas than downtowns and instead use them over a gym.
Moderna is a vaccine company. You are betting on them getting a big payout.
It's psychological, but it also goes from an understanding that profits, in the rigid economic sense, don't reliably exist.
A profit is gain realized by buying things, recombining them using innovation, and selling at a favorable price. A true profit is something you make, again and again, and with diminishing returns because prices move and the gap closes, as with arbitrages. Rents, which are more reliable, are payments you collect because you own things. (You may use those things, or you may, using the more common sense of the word, rent those things out.)
Most "profits" are actually just rents. Rents extracted because the company owns real estate, rents extracted because of brand presence, interest (which is a rent on money) through financing programs, rents extracted because workers' need for daily survival has them systematically underpricing their labor, and rents on political capital (favorable regulatory environment).
Getting paid because you have a great idea is intermittent, and usually requires taking on a lot of risk, and risk is something established companies hate. Getting paid because you own something is easy-as-shit and forever reliable. Where does the car industry make the bulk of its gains? Not on selling the cars, but in financing. It's an evergreen business, so long as there is capitalism-- there will always be people who need money they don't have, and it will always be an easy business to collect the vig.
Regular businesses eventually stop innovating-- they have plenty of smart people, but the bosses don't want to take risks because they're busy collecting personal rents by holding management positions, and obviously don't want to lose that-- and their "profits" converge to the rent roll on the resources they own. That's just how it works. Average equals mediocre, the latter used non-pejoratively.
That said, it's not sexy to imagine that one is investing into companies that have become mere utilities, that will continue to collect rents on the resources they own (of which a person can buy a tiny fractional share of the ownership) but not really do anything interesting.
These ultra-capitalist non-profits (non-profits-for-now) create the illusion that they're something different... that they're "rocket ship" companies run by people with supernatural talent and "vision", that they aren't rent-seekers using capital's native advantage over labor for reliable but unpulchritudinous gains... which is what all large companies are... but, instead, a kind of "new company" that is going to innovate moonshots and synergize us up a new century of prosperity, freedom, and magical puppies that never poop. Smart investors recognize that all of that is bullshit, and that these tech unicorns are just as exploitative as traditional companies (and, in fact, probably more so) but they also realize that dumber investors get the warm fuzzies and that there is therefore a premium.
So if I'm reading this right, the author feels that the reason these companies are so valuable is because it destroys the free market one customer at a time, selling lock ins that would crush a normal business to escape, and that will deliver long term value as a result of said destruction.
I guess that makes sense.
See, the market is itself a commons, which we are obligated to destroy in our search for profit and pure, unadulterated freedom. (but mostly profit.)