"The parabolic rise of a growing number of market-leading story stocks created a challenging environment for value investors. Speculators have momentarily accepted the ruse that, for these visionary companies, profitability would be a mistake. Eventually, the market will remember that having a disruptive product that customers will happily buy if sold near cost is not the same as having a valuable business."
And therein lies the story of this market and the story of so many companies that, based on the numbers, may look as if they're perched on a precarious ledge, but based on their stocks, appear to be anything but.
All three have services or products that have disrupted, been well executed and, in general, have broad public acceptance and admiration.
- While Netflix's subscriber and revenue growth is nothing short of impressive, its cash flow isn't -- and its billions in off-balance sheet content costs, which equal future expenses that have been swept under the rug or kicked like a can down the road (you pick your metaphor), shouldn't be entirely ignored. All of this as the company is suggesting it may be lowering prices. In the wake of Wednesday's earnings results, a number of analysts seem to be hedging their bets by raising price targets as they slice or don't raise earnings estimates.
- While Tesla's Model-S is one fine looking automobile, and the company's out-of-nowhere success is one for the books, it really eventually does have to consistently make real money -- and not the manufactured kind created by pulling financial statement levers. Even so, its market value is higher than Netflix's.
- While Amazon delivers a great customer experience, one day its revenue growth really is slowing and one day it really has to make money. For now, it remains the ultimate in convincing investors that it eschews profits for future growth.
Reality: In markets like these, with stocks like those, investor psychology trumps financial statement logic. It's the way it is, the way it has been and the way it always will be. Until the mood (or the metrics anointed as the ones to watch) change, party on! And what a party it has been. Now back to watching my Netflix on that big computer screen in my Tesla while opening another browser to shop on my Amazon -- all while speeding down the highway. Does not get better than this.
-- Written by Herb Greenberg in San Diego