Why are so many unprofitable companies the best performing stocks this year?(awealthofcommonsense.com) |
Why are so many unprofitable companies the best performing stocks this year?(awealthofcommonsense.com) |
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.
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.
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.
I guess that makes sense.
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
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.
Or as they use to say, we lose money on each unit but we'll make it up in volume.
...
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.
https://www.nytimes.com/2018/05/16/technology/moviepass-econ...
(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.)
I didn't know that's what they had intended. I never once thought that's what they were going for.
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.
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.
> Russ Hanneman is a multi-billionaire who claims to have "put radio on the internet".
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.
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.
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.
it use to be 10%, in the late 2000s it got revised to 7%, though many today think it's realistically 5%.
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.
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.
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.
That show is so on point sometimes.
It is a pyramid scheme and must pop someday. Really just depends on how/what/when the Fed does.
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?
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.
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.
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.
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).
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.
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).
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.
Tesla is not small anymore by revenue but it's not in top 100 US companies either.
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.
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
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.
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 smart enough to know if this is just a looming bow-wave or that the previous assumptions don't hold.
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.
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.
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.
That's why we don't have flying cars. Instead of investment in core competencies we invest in the market.
There central company to the article’s point (Snowflake) has no profit to reinvest
They reinvest the money before it could become profit, mostly by hiring more sales
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
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.
The stock market is bloated. It will be interesting how we will get out of that again.
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?
https://www.marketwatch.com/investing/stock/ostk/financials/...
https://money.cnn.com/2018/08/10/technology/overstock-blockc...
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
Everything thinks what they’re building is worth a lot of money but get jealous when they see high valuations from others :)
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.
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.
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.
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.
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.
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.
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.
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
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.
I believe this is a joke, no? I.e. you can't lose money on each unit and "make it up in volume."
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?
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+.
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.
Of course, this is predicated on being able to cover medical expenses without your HSA.
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...
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.
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.