Paul Price/Eric Reed/12092021
One of the quirks of Wall Street is the (temporary) success of companies that don’t make any money.
Eager not to miss the next Meta (Facebook) (FB) - Get Meta Platforms Inc. Class A Report, Airbnb (ABNB) - Get Airbnb, Inc. Class A Report or Amazon (AMZN) - Get Amazon.com, Inc. Report, investors have tripped over themselves to throw cash at money-losing ventures like Beyond Meat (BYND) - Get Beyond Meat, Inc. Report, DraftKings (DKNG) - Get DraftKings Inc Class A Report and Peloton (PTON) - Get Peloton Interactive, Inc. Class A Report. These companies are good at generating attention and users, but not great at generating profit.
What makes less sense is that this business model still hasn’t turned off investors.
“What is the stock market's equivalent to playing with fire?” Paul Price asked recently on Real Money. “I'd say it is traders' willingness to own shares of companies which have never turned a profit.”
By definition, money-losing companies, even those who have potentially good prospects, are becoming less valuable on an absolute basis by the amount of their losses.
Price notes that “market darling DocuSign Inc. (DOCU) - Get DocuSign, Inc. Report benefited from being a ‘stay at home’ play during the Covid-19 lockdowns. Its shares topped out at $290.20 in 2020 and rose to $314.76 just a few months ago. After reporting disappointing fiscal third quarter results on Dec. 2, however, reality started to set in. The stock was down by about 57% from that recent peak on Dec. 3.”
With cumulative net losses since 2018 approaching $1 billion, few people were expecting profitability in 2022 even before the latest report, Price observed, adding “Estimates are now sure to be scaled back further.”
In reality, “there's no way to place any particular price target on a company with good revenues but huge losses … DocuSign is not alone in this category. Other firms with huge fan bases, such as DraftKings , Peloton and Beyond Meat have experienced major sell-offs from 52-week highs.”
In the end, Price says, “If you can't make a clear estimate of a company's real worth, it is best to simply leave those stocks for others to play with.”