No profit? No problem. Investors keep snapping up loss-making companies

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#1
No profit? No problem. Investors keep snapping up loss-making companies

Xin En Lee
August 29, 2018

Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money.

Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses.

Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing that will likely take place next year.

Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.

That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.

The rapid growth of the tech sector is one reason why investors are willing to put their money into unprofitable companies, since many shareholders value growth and tend to be more comfortable even if firms aren't making huge margins.

Ritter's data showed that of the companies that went public last year, just 17 percent of tech companies were profitable compared with 43 percent of non-tech companies.

The rise of tech titan Amazon shows just that: Investors are keen on a new business model.

Despite being light on profits, Amazon is the world's second most valuable company by market cap. That has made its founder Jeff Bezos the richest man in modern history, with a net worth of more than $150 billion.

Investors love Amazon's stocks, but the company's total profit for the past two decades pales in comparison to other highly valued companies in the U.S.

According to Thomson Reuters data, Amazon's profits for the last 20 years total less than $8 billion while Apple recorded profits of about $327 billion during the same period, and Facebook made $37 billion in the last decade.

In fact, the market's euphoria for so-called "growth companies" made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.

In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

More details in https://www.cnbc.com/2018/08/29/no-profi...anies.html
Specuvestor: Asset - Business - Structure.
Reply
#1
No profit? No problem. Investors keep snapping up loss-making companies

Xin En Lee
August 29, 2018

Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money.

Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses.

Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing that will likely take place next year.

Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.

That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.

The rapid growth of the tech sector is one reason why investors are willing to put their money into unprofitable companies, since many shareholders value growth and tend to be more comfortable even if firms aren't making huge margins.

Ritter's data showed that of the companies that went public last year, just 17 percent of tech companies were profitable compared with 43 percent of non-tech companies.

The rise of tech titan Amazon shows just that: Investors are keen on a new business model.

Despite being light on profits, Amazon is the world's second most valuable company by market cap. That has made its founder Jeff Bezos the richest man in modern history, with a net worth of more than $150 billion.

Investors love Amazon's stocks, but the company's total profit for the past two decades pales in comparison to other highly valued companies in the U.S.

According to Thomson Reuters data, Amazon's profits for the last 20 years total less than $8 billion while Apple recorded profits of about $327 billion during the same period, and Facebook made $37 billion in the last decade.

In fact, the market's euphoria for so-called "growth companies" made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.

In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

More details in https://www.cnbc.com/2018/08/29/no-profi...anies.html
Specuvestor: Asset - Business - Structure.
Reply
#2
Many venture capitalists, and other investors of lost making tech companies, like Chamath Palihapitiya, Larry Page, and Jeff Bezos himself, cites Warren Buffett as a source of their inspiration. 

IMO, traditional value investors and investors in "lost making" growth companies operate with very similar principals: they invest in companies that could potentially make much more money in the future, discount the potential cash flow from the far future back to the present, then buy companies that are selling below their intrinsic value. 

The difference is, traditional value investors are more inclined to buy mature companies with proven business models, but lower growth potential (usually more concentrated portfolio of high quality companies with low risk, and moderate returns). And venture capitalists tries to buy companies with potential of very high returns (the next big thing; they usually have a very diversified portfolio of high risk companies; max lost is 100%, max return could be 100x).

Both strategies tries to achieve asymmetric risk-reward, with odds tilted in their own favor.
“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” - Charlie Munger
Reply
#2
Many venture capitalists, and other investors of lost making tech companies, like Chamath Palihapitiya, Larry Page, and Jeff Bezos himself, cites Warren Buffett as a source of their inspiration. 

IMO, traditional value investors and investors in "lost making" growth companies operate with very similar principals: they invest in companies that could potentially make much more money in the future, discount the potential cash flow from the far future back to the present, then buy companies that are selling below their intrinsic value. 

The difference is, traditional value investors are more inclined to buy mature companies with proven business models, but lower growth potential (usually more concentrated portfolio of high quality companies with low risk, and moderate returns). And venture capitalists tries to buy companies with potential of very high returns (the next big thing; they usually have a very diversified portfolio of high risk companies; max lost is 100%, max return could be 100x).

Both strategies tries to achieve asymmetric risk-reward, with odds tilted in their own favor.
“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” - Charlie Munger
Reply
#3
(29-08-2018, 05:37 PM)cyclone Wrote: No profit? No problem. Investors keep snapping up loss-making companies

Xin En Lee
August 29, 2018

Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money.

Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses.

Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing that will likely take place next year.

Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.

That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.

The rapid growth of the tech sector is one reason why investors are willing to put their money into unprofitable companies, since many shareholders value growth and tend to be more comfortable even if firms aren't making huge margins.

Ritter's data showed that of the companies that went public last year, just 17 percent of tech companies were profitable compared with 43 percent of non-tech companies.

The rise of tech titan Amazon shows just that: Investors are keen on a new business model.

Despite being light on profits, Amazon is the world's second most valuable company by market cap. That has made its founder Jeff Bezos the richest man in modern history, with a net worth of more than $150 billion.

Investors love Amazon's stocks, but the company's total profit for the past two decades pales in comparison to other highly valued companies in the U.S.

According to Thomson Reuters data, Amazon's profits for the last 20 years total less than $8 billion while Apple recorded profits of about $327 billion during the same period, and Facebook made $37 billion in the last decade.

In fact, the market's euphoria for so-called "growth companies" made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.

In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

More details in https://www.cnbc.com/2018/08/29/no-profi...anies.html

A third of the companies in the Russell make no money but the index is currently at all time highs so Tesla's and spotify's valuations really aren't out of line, thats the norm.

Its not so crazy if you think about it, many govt bonds in developed economies yield next to nothing (record bond prices), vintage Ferraris and fine art are going for record sums of money at auctions and property in major cities are running red hot, etc etc etc so the fact that investors are betting on money losing companies isn't all that surprising.

There are some serious asset bubbles being inflated right now and we all know how it ends.
Reply
#3
(29-08-2018, 05:37 PM)cyclone Wrote: No profit? No problem. Investors keep snapping up loss-making companies

Xin En Lee
August 29, 2018

Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money.

Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses.

Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing that will likely take place next year.

Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.

That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.

The rapid growth of the tech sector is one reason why investors are willing to put their money into unprofitable companies, since many shareholders value growth and tend to be more comfortable even if firms aren't making huge margins.

Ritter's data showed that of the companies that went public last year, just 17 percent of tech companies were profitable compared with 43 percent of non-tech companies.

The rise of tech titan Amazon shows just that: Investors are keen on a new business model.

Despite being light on profits, Amazon is the world's second most valuable company by market cap. That has made its founder Jeff Bezos the richest man in modern history, with a net worth of more than $150 billion.

Investors love Amazon's stocks, but the company's total profit for the past two decades pales in comparison to other highly valued companies in the U.S.

According to Thomson Reuters data, Amazon's profits for the last 20 years total less than $8 billion while Apple recorded profits of about $327 billion during the same period, and Facebook made $37 billion in the last decade.

In fact, the market's euphoria for so-called "growth companies" made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.

In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

More details in https://www.cnbc.com/2018/08/29/no-profi...anies.html

A third of the companies in the Russell make no money but the index is currently at all time highs so Tesla's and spotify's valuations really aren't out of line, thats the norm.

Its not so crazy if you think about it, many govt bonds in developed economies yield next to nothing (record bond prices), vintage Ferraris and fine art are going for record sums of money at auctions and property in major cities are running red hot, etc etc etc so the fact that investors are betting on money losing companies isn't all that surprising.

There are some serious asset bubbles being inflated right now and we all know how it ends.
Reply
#4
Quote:In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

I never believed shorting Tesla and Amazon is a good strategy even for a traditional value investor. I can't help but feel that he is making excuses for his short trading failures. 

How stock prices move in the short term (3-5 years), lies solely with market sentiment. When he made those short positions, he is making a prediction on market sentiment and the timing. They were never sure bets (even if he was right), and is definitely not "value investing".

Edit: To substantiate, Berkshire, Mohnish Pabrai, Markel Corp etc. (to name a few value investors) did quite well during the periods Einhorn under-performed. Value investing is still alive and well.
“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” - Charlie Munger
Reply
#4
Quote:In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

I never believed shorting Tesla and Amazon is a good strategy even for a traditional value investor. I can't help but feel that he is making excuses for his short trading failures. 

How stock prices move in the short term (3-5 years), lies solely with market sentiment. When he made those short positions, he is making a prediction on market sentiment and the timing. They were never sure bets (even if he was right), and is definitely not "value investing".

Edit: To substantiate, Berkshire, Mohnish Pabrai, Markel Corp etc. (to name a few value investors) did quite well during the periods Einhorn under-performed. Value investing is still alive and well.
“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” - Charlie Munger
Reply
#5
https://www.wsj.com/articles/silicon-val...1548153000

Party coming to an end? Or maybe central banks will (again) blink and continue to inflate these asset bubbles...
Reply
#5
https://www.wsj.com/articles/silicon-val...1548153000

Party coming to an end? Or maybe central banks will (again) blink and continue to inflate these asset bubbles...
Reply


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