Play With Fire? You Might Get Burned

What is the stock market's equivalent to playing with fire? 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. Market darling DocuSign Inc. 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. Cumulative net losses since 2018 are likely to ring in at about a cool $1 billion. Few people were expecting profitability in 2022 before the latest report. Estimates are now sure to be scaled back further. Those long the stock were down a stunning 41.46% on the day (as of 2:24 PM). Worse, still, there's no way to place any particular price target on a company with good revenues but huge losses. If any reader would like to tell me what DocuSign is worth on a fundamental basis, I'd be interested in hearing their reasoning. DocuSign IPOed at $29. It did a secondary offering that same year at $55. Rapidly rising revenues have not been enough to avoid further losses. Value Line mistakenly called DocuSign as a year-ahead Buy less than six weeks ago, near $278. Where is the bottom? Who knows? Meanwhile there are no dividends and no earnings to keep the debt-laden company on analysts' buy lists. 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 as illustrated below. Three of the four carved out new yearly nadirs in Friday's session. Traders love the idea of on-line sports betting. It is certainly growing by leaps and bounds. Unfortunately, DraftKings has burned through about $2 billion already and appears poised for another huge loss in 2022. The shares are now down by almost 63% from their March 2021 high. Ouch. What were the people buying in earlier this year thinking? Peloton was another of the stay at home plays in 2020. It didn't manage to make money even in that most favorable of all environments. Now, with customers dropping subscriptions as they return to physical gyms, Peloton could be in trouble. From its 2021 high of $171.09 Peloton was already off by around 75% and might not even be worth close to what it still fetches. Beyond Meat was a beloved stock after IPOing at $25, opening around $45 and surging to almost $202 within a few months. It wasn't making money back then and, despite rising sales, it fell even deeper in the red during 2020 and 2021. Value Line and most other research houses have losses penciled in for Beyond Meat in 2022. Those who plunked down over $220 a share to own the shares last January were off a stunning 71.2% in early afternoon on Dec. 3. The company was happy to get $25 in its IPO. Now, after a couple more disappointing years, there's no reason it can't sink to that level or worse unless things improve greatly. There are dozens more companies with similar looks. Traders get seduced by the stories of their products or services without really figuring out what they'd actually pay to own them, or even want to own them, in the absence of a public market to play the shares' high volatility. People betting on sports know they are gambling. Traders going into and out of these high-risk stocks fool themselves into believing they are investors. 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. Other big name stocks with similar characteristics to the four I showed here include Carvana , Plug Power , Snap and Teladoc . Steer clear of those, too, unless you're simply willing to take a gamble.

Play With Fire? You Might Get Burned

Money-losing companies, even those who have potentially good prospects, are becoming less valuable on an absolute basis by the amount of their losses.

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