When we talk about stock market bubbles and wildly overvalued stocks, technology stocks are the obvious businesses that come to mind. It was in the late 1990s that the first wave of dotcoms surfaced, promising that the internet would enable everything at the push of a button. Dozens of online ideas surfaced and enjoyed multibillion dollar valuations without ever having earned a dime of profit. In some cases, many companies were pure ideas and concepts, with little to no revenue.
The market still bestows fantasy-like valuations on some of today's tech darlings. To be sure, today many are very profitable and growing quickly, but the valuations still remain a mystery to me. However, the market doesn't stop with technology stocks, and investors should be just as skeptical.
We have a company that makes automobiles, Tesla Motors (TSLA), which is being valued at nearly $30 billion that is yet to turn a profit. And profitability looks to be years away. Consider that Tesla's market cap is about 3.5x that of iconic sports car market Ferrari (RACE). I would rather own 3.5x companies like Ferrari, which generates nearly 20% operating margins.
We have a company that makes hamburgers, which ironically is dubbed the "Tesla of hamburgers": Shake Shack (SHAK), which a year ago was being valued at over $3 billion. Today, after a 60% drop in the share price, the market value is still an absurd $1.3 billion for a company with less than 90 restaurants. Each restaurant is being valued at $15 million and generates about $2 million in annual sales. Based on 2015 operating income of $7 million each store is earning about $75,000 in pre-tax income.
I think Tesla makes awesome cars and Shake Shack has a delicious burger. They are both fine companies that are doing some good things. But there is a fine line between a great business and a great investment. And any time the market gets euphoric on a concept or dream of the future, that's a great signal to avoid making an investment.