So what are these companies that investors are so keen to throw their money at? It’s mostly those who have an established business in an area that investors hope to become gangbusters, but haven’t quite taken off yet, Opsal says.
Its examples include the plant-based meat company Beyond Meat, the used car e-commerce platform Carvana, and the streaming platform Roku. (Beyond Meat and Carvana did not respond to Money’s request for comment; a representative for Roku told Money an excerpt from its Q4 2020 letter to shareholders, which indicated that the company would continue to invest in the company to begin its future growth.)
Normally, investors can be happy to rely on good quality, low volatility stocks that can pay some dividends.
But things are not normal at the moment. Bitcoin – the cryptocurrency that pays no dividends or interest – is skyrocketing and a non-fungible token craze is pushing people to fork out thousands of dollars for digital art of Lebron James diving and an animated cat with a Pop- Tart for a body. An army of everyday traders on Reddit recently skyrocketed “memes stocks” and Tesla’s stocks look unstoppable, while the Dow and S&P 500 continue to hit record highs.
Whether or not that means we’re going to see a stock market bubble is up for debate, but the fact that unprofitable companies have such a high market value shows that market sentiment is high, Opsal says. For many investors, earning 8-10% per year on their investments may no longer be enough. They are looking for home runs.
“You only get those of the startups and innovators who might end up being the sole winning champion of the whole pack,” Opsal explains.
Investors haven’t shown so much confidence in unprofitable companies for almost 20 years. So what’s similar by then?
A changing world. At the end of the 90s, this change was made thanks to the Internet. We went from 8% of the country’s households with a computer in 1984 to 51% in 2000 as Dell and Apple competed for customers. The World Wide Web has connected people across the globe, and 20 years later you are probably shopping online as much as you shop in-store, if not more.
The world is changing again… and fast. We are on the cusp of a green revolution and continue to see innovation in cloud computing and even space tourism, Opsal said. If any of these changes become as routine as hitting “buy” with an Amazon Prime account, some stocks betting on those changes will become real winners.
To forecast an established, profitable business – think Nike or Starbucks – analysts can look at numbers like profit margins and historical growth rate. But a business not yet profitable?
“We could almost pick any number in the air and defend it as well as any,” Opsal explains.
One measure these companies tout is free cash flow, a way of measuring the cash that flows in and out of a company’s coffers each quarter. Management knows that as long as it can generate cash flow, it can stay in business long enough to achieve its vision, adds Opsal. But if they run out, the game might be over.
While the claim that medieval cartographers labeled uncharted territories with the phrase “Here Be Dragons” may be unfounded, it is ripe for an analogy here.
“If you’re willing to navigate the land of vision stocks and pay a heavy price for it, you could fall to the ground,” Opsal says. “You could be eaten by dragons. “
You like a brand. Should you buy its stock?
What rising interest rates mean for your bond funds (hint: it’ll hurt)
This key indicator of bonds signals inflation. Here’s what it means for your wallet