If you're losing money on each sale then sales growth is the fastest way to bankruptcy. The entire tech industry is built around sales growth. It's very easy to post growth numbers if you buy them...
If you're losing money on each sale then sales growth is the fastest way to bankruptcy. The entire tech industry is built around sales growth. It's very easy to post growth numbers if you buy them or sell your product at a loss...the only type of business logic that makes sense with that strategy is if the business exists only to be inflated and sold as quickly as possible. In a couple of rare cases it's about building a monopoly where a business can overcharge, under-deliver, and crowd out any competitors, which is also not healthy.
This is part of what people are complaining about when they talk about the unmooring of the stock market to the "real economy", especially with respect to tech companies.
Some startups and unicorns do operate at a loss, but the big tech companies are very profitable. Some tech companies are built to be acquisition targets, but others are the ones making the...
Some startups and unicorns do operate at a loss, but the big tech companies are very profitable. Some tech companies are built to be acquisition targets, but others are the ones making the acquisitions.
In some cases a fast-growing company could be profitable if they didn’t spend so much on growth. The trouble is, it can be difficult to know for sure whether that would really happen.
The stock market tries to predict what would happen in future years and that’s especially striking this year when short-term and long-term prospects are so different. But for tech companies they are always looking ahead like that. You might say that a lot of non-tech companies currently look like tech stocks because they’re currently losing money, but investors think that’s very likely to change.
The "unprofitable tech company with fast revenue growth" gets more visibility than they are actually proportional to the markets. Let's look at the top 10 companies for QQQ, the "standard" tech...
The "unprofitable tech company with fast revenue growth" gets more visibility than they are actually proportional to the markets. Let's look at the top 10 companies for QQQ, the "standard" tech ETF, for instance.
Apple (very profitable)
Microsoft (very profitable)
Amazon (very profitable)
Tesla (technically profitable)
Facebook (very profitable)
Nvidia (very profitable)
Paypal (profitable)
Comcast (a literal monopoly)
Adobe (profitable)
Netflix (profitable although on an amortized basis)
These represent over 53% of QQQ's total weight, and really only Tesla is kinda egregious, although yes, it is actually GAAP profitable, just nowhere near where its market cap would indicate.
There are a few unicorns that launch onto the public markets that are unprofitable, and some will find a path to profitability, some won't, but they have a very small actual effect on the markets as a whole. Uber is only worth 30ish billion, for instance.
Remember, I said: I would argue that half of the businesses that you listed meet that definition. Either in practice, or in plan. Adobe, Amazon, Facebook, Comcast absolutely meet that definition....
Remember, I said:
" In a couple of rare cases it's about building a monopoly where a business can overcharge, under-deliver, and crowd out any competitors, which is also not healthy."
I would argue that half of the businesses that you listed meet that definition. Either in practice, or in plan. Adobe, Amazon, Facebook, Comcast absolutely meet that definition. Tesla stock is priced on the plan of a hypothetical future monopoly, which is why they get away with accounting gimmicks.
There is an alternative, but it’s not much better. Some companies, backed by vast sums of venture capital, will adopt the abstract strategy of selling dollars for cents. Their game plan is to...
the only type of business logic that makes sense with that strategy is if the business exists only to be inflated and sold as quickly as possible.
There is an alternative, but it’s not much better. Some companies, backed by vast sums of venture capital, will adopt the abstract strategy of selling dollars for cents. Their game plan is to price out competitors who are unwilling to sell at a loss. Once they drive out the competition and establish an effective monopoly, they will then price-gouge. It’s anticompetitive, and yes there should be laws against this, but this has essentially been the initial model for Uber, MoviePass, and some other "disruptive" startups.
The clearest indication that the stock market is being driven by economic fundamentals is that growth and declines in sales so easily explain stock market returns. If stock market returns and the “real economy” were very disconnected, we’d expect the sales factor to be submerged in a sea of speculation. Instead, the chart below shows us another story. Once returns are broken down by sales growth, we see dramatic differences based on sales growth and decline. Returns are in fact highest for companies with the strongest year-over-year sales growth. Among those with sales growth greater than 20% are familiar companies like Amazon and Netflix, but also much smaller companies like Nvidia and Paypal. In other words, tech stock returns are being driven by tech sales.
This seems to show much more matching between sales and returns than our stock market sceptics would have us believe. Companies that have seen sales collapse have seen hugely negative returns. Companies that have seen big jumps in sales, have seen big returns. Companies that are treading water in sales are also treading water in stock returns. It’s hard to see from this data any reason to think the stock market is particularly disconnected from the ‘real’ shape of things.
This does not mean that stocks, especially the ones that have really run up in price, are avoiding overvaluation. However, that is a different question. If there are overvalued stocks, it is likely caused by companies that have seen the biggest sales growth leading to overoptimistic expectations of future sales growth. Overconfidence reflects the economy and beliefs about the economy, while none of us know the future. But this is a generic point, not an argument for setting aside consideration of the stock market. Stocks with the highest valuation, as measured by forward price to earnings ratio, have in fact gained the most year-to-date.
Stock markets are supposed to reflect the information available (so called efficient-market hypothesis) so it's not really surprising to find correlation with good and bad news after the fact; the...
Stock markets are supposed to reflect the information available (so called efficient-market hypothesis) so it's not really surprising to find correlation with good and bad news after the fact; the trade-bots read the news-bots. Still the stock market doesn't have much causal power in the economic dynamics I think (besides crashes), it's more surface ripples, so it won't really help you understand and predict what's going on.
One thing people don't often realize is that the stock market is mostly a market of used good, newly emitted stocks are a tiny minority of what's sold and bought each day. It's like trying to understand the economy by looking at the price of pokemon cards on ebay. Yes you might find some interesting correlations but you won't go very far either.
It’s a bit different than collectibles due to dividends and stock buybacks. These can be difficult to predict, particularly for companies that don’t have dividends, but there is an assumption that...
It’s a bit different than collectibles due to dividends and stock buybacks. These can be difficult to predict, particularly for companies that don’t have dividends, but there is an assumption that profitable companies will eventually pay out. A stock is a claim on an uncertain amount of future income and that will still be true after it’s not hot anymore.
If you're losing money on each sale then sales growth is the fastest way to bankruptcy. The entire tech industry is built around sales growth. It's very easy to post growth numbers if you buy them or sell your product at a loss...the only type of business logic that makes sense with that strategy is if the business exists only to be inflated and sold as quickly as possible. In a couple of rare cases it's about building a monopoly where a business can overcharge, under-deliver, and crowd out any competitors, which is also not healthy.
This is part of what people are complaining about when they talk about the unmooring of the stock market to the "real economy", especially with respect to tech companies.
Some startups and unicorns do operate at a loss, but the big tech companies are very profitable. Some tech companies are built to be acquisition targets, but others are the ones making the acquisitions.
In some cases a fast-growing company could be profitable if they didn’t spend so much on growth. The trouble is, it can be difficult to know for sure whether that would really happen.
The stock market tries to predict what would happen in future years and that’s especially striking this year when short-term and long-term prospects are so different. But for tech companies they are always looking ahead like that. You might say that a lot of non-tech companies currently look like tech stocks because they’re currently losing money, but investors think that’s very likely to change.
The "unprofitable tech company with fast revenue growth" gets more visibility than they are actually proportional to the markets. Let's look at the top 10 companies for QQQ, the "standard" tech ETF, for instance.
Apple (very profitable)
Microsoft (very profitable)
Amazon (very profitable)
Tesla (technically profitable)
Facebook (very profitable)
Nvidia (very profitable)
Paypal (profitable)
Comcast (a literal monopoly)
Adobe (profitable)
Netflix (profitable although on an amortized basis)
These represent over 53% of QQQ's total weight, and really only Tesla is kinda egregious, although yes, it is actually GAAP profitable, just nowhere near where its market cap would indicate.
There are a few unicorns that launch onto the public markets that are unprofitable, and some will find a path to profitability, some won't, but they have a very small actual effect on the markets as a whole. Uber is only worth 30ish billion, for instance.
Remember, I said:
I would argue that half of the businesses that you listed meet that definition. Either in practice, or in plan. Adobe, Amazon, Facebook, Comcast absolutely meet that definition. Tesla stock is priced on the plan of a hypothetical future monopoly, which is why they get away with accounting gimmicks.
There is an alternative, but it’s not much better. Some companies, backed by vast sums of venture capital, will adopt the abstract strategy of selling dollars for cents. Their game plan is to price out competitors who are unwilling to sell at a loss. Once they drive out the competition and establish an effective monopoly, they will then price-gouge. It’s anticompetitive, and yes there should be laws against this, but this has essentially been the initial model for Uber, MoviePass, and some other "disruptive" startups.
From the article:
Stock markets are supposed to reflect the information available (so called efficient-market hypothesis) so it's not really surprising to find correlation with good and bad news after the fact; the trade-bots read the news-bots. Still the stock market doesn't have much causal power in the economic dynamics I think (besides crashes), it's more surface ripples, so it won't really help you understand and predict what's going on.
One thing people don't often realize is that the stock market is mostly a market of used good, newly emitted stocks are a tiny minority of what's sold and bought each day. It's like trying to understand the economy by looking at the price of pokemon cards on ebay. Yes you might find some interesting correlations but you won't go very far either.
It’s a bit different than collectibles due to dividends and stock buybacks. These can be difficult to predict, particularly for companies that don’t have dividends, but there is an assumption that profitable companies will eventually pay out. A stock is a claim on an uncertain amount of future income and that will still be true after it’s not hot anymore.