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Why are so many unprofitable companies the best performing stocks this year?

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Re: Why are so many unprofitable companies the best performing stocks this year?

#81

Post by tornato7 »

sharkweek wrote: post #11

I 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 a…

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.

Re: Why are so many unprofitable companies the best performing stocks this year?

#82

Post by cj »

coldcode wrote: post #42
TuringNYC wrote: post #9

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 fu…

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).

Re: Why are so many unprofitable companies the best performing stocks this year?

#83

Post by runako »

santa_boy wrote: post #52
mdorazio wrote: post #10

"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…

> 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…

> 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.

Re: Why are so many unprofitable companies the best performing stocks this year?

#84

Post by dustingetz »

eeZah7Ux wrote: post #74
ComputerGuru wrote: post #57

Earlier quoted context omitted.

What will they do, put a gun to consumers’ heads to force them to buy exercise bikes and the latest iPhone models?

Not: put a gun to people in other countries heads to force them to sign contracts that are very favorable to the US https://en.wikipedia.org/wiki/Gunboat_diplomacy

Relevant: Map of US Navy "deployed carrier strike groups" in conspicuous locations https://news.usni.org/category/fleet-tracker

Re: Why are so many unprofitable companies the best performing stocks this year?

#86

Post by baron_harkonnen »

sharkweek wrote: post #11

I 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 a…

> 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.

Re: Why are so many unprofitable companies the best performing stocks this year?

#87

Post by volgo »

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 :)

Re: Why are so many unprofitable companies the best performing stocks this year?

#88

Post by munificent »

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.

Re: Why are so many unprofitable companies the best performing stocks this year?

#89

Post by vasco »

tornato7 wrote: post #81
sharkweek wrote: post #11

I 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 a…

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…

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.

Re: Why are so many unprofitable companies the best performing stocks this year?

#90

Post by trixie_ »

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?

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