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The Paradox of Unprofitable High-Growth Stocks: Outperformance in the Face of Financial Challenges
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The Speculative Juices are Flowing
Parts of the 2023 market are beginning to feel like the post-COVID equity market that led to a Nasdaq 100 ETF ((QQQ - Free Report) ) double in just a few years. Like the market back then, big, institutional quality, and profitable companies like Apple ((AAPL - Free Report) ) and Microsoft ((MSFT - Free Report) ) are performing well. However, unprofitable, highly speculative tech stocks are also making a comeback. For example, Carvana ((CVNA - Free Report) ), a once-troubled e-commerce platform for buying and selling used cars, is up 600% - since the end of May!
Image Source: Zacks Investment Research
The meteoric move higher is beginning to feel eerily reminiscent of the advances seen in AMC Theaters ((AMC - Free Report) ) and GameStop ((GME - Free Report) ) during the “Wall Street Bets” craze of 2021.
Image Source: Zacks Investment Research
What Should Investors Make of the Moves in Unprofitable Tech Stocks?
Though one can argue about whether the move in a stock like Carvana is bubbly, the reasoning behind the move is much different than the reasoning behind the moves in the meme stocks like AMC or GameStop because:
Relativity Matters
In late 2022, many investors (including myself) thought there was a good chance that Carvana would go bankrupt. First, the stock was trading at all-time lows of ~$3 after trading as high as $376 just two years before. Second, the company was hemorrhaging cash at an alarming rate.
Image Source: Zacks Investment Research
However, the stock’s character changed drastically on June 8th when the company announced an improved financial outlook for the second quarter and shares rocketed by more than 50% in a single session as shorts rushed to cover.
The lesson is clear – profitability or financial health are not necessary for a company to have a large move higher. What is required is that, relative to the past, the fundamentals are seen as changing for the better. In Zacks Rank #2 (BUY) Carvana’s case, consensus EPS estimates suggest mid-double-digit growth over the next three quarters – a dramatic improvement versus the negative growth from the previous three quarters.
Image Source: Zacks Investment Research
Know the Market Environment
The last two years are proof that, most of the time, the market environment matters and is cyclical. For example, while tech was melting down in 2022, dividend and old-economy stocks outperformed. In 2023, the trend has cycled back, and non-dividend-paying stocks outperform dividend-payers.
Image Source: GFD
Cathie Wood’s active ARK Innovation ETF (ARKK) is a prime example of the move back to growth and innovation over safety and stability. Some of ARKK’s largest holdings include unprofitable yet highly innovative companies such as Unity Software (U), UiPath (PATH), and Coinbase (COIN). Earlier this week, ARKK emerged from a multi-month base structure and hit fresh 52-week highs.
Image Source: TradingView
Know your Mandate
Your investments should fit your personal goals. If you’re running a long-duration retirement portfolio, continuously adding to dividend payers almost always makes sense. Conversely, if you are actively trading and attempting to outperform the market, you can venture into high-performing momentum stocks that outperform in the current market. As always, risk mitigation is paramount, and combining both strategies can produce strong results.
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The Paradox of Unprofitable High-Growth Stocks: Outperformance in the Face of Financial Challenges
The Speculative Juices are Flowing
Parts of the 2023 market are beginning to feel like the post-COVID equity market that led to a Nasdaq 100 ETF ((QQQ - Free Report) ) double in just a few years. Like the market back then, big, institutional quality, and profitable companies like Apple ((AAPL - Free Report) ) and Microsoft ((MSFT - Free Report) ) are performing well. However, unprofitable, highly speculative tech stocks are also making a comeback. For example, Carvana ((CVNA - Free Report) ), a once-troubled e-commerce platform for buying and selling used cars, is up 600% - since the end of May!
Image Source: Zacks Investment Research
The meteoric move higher is beginning to feel eerily reminiscent of the advances seen in AMC Theaters ((AMC - Free Report) ) and GameStop ((GME - Free Report) ) during the “Wall Street Bets” craze of 2021.
Image Source: Zacks Investment Research
What Should Investors Make of the Moves in Unprofitable Tech Stocks?
Though one can argue about whether the move in a stock like Carvana is bubbly, the reasoning behind the move is much different than the reasoning behind the moves in the meme stocks like AMC or GameStop because:
Relativity Matters
In late 2022, many investors (including myself) thought there was a good chance that Carvana would go bankrupt. First, the stock was trading at all-time lows of ~$3 after trading as high as $376 just two years before. Second, the company was hemorrhaging cash at an alarming rate.
Image Source: Zacks Investment Research
However, the stock’s character changed drastically on June 8th when the company announced an improved financial outlook for the second quarter and shares rocketed by more than 50% in a single session as shorts rushed to cover.
The lesson is clear – profitability or financial health are not necessary for a company to have a large move higher. What is required is that, relative to the past, the fundamentals are seen as changing for the better. In Zacks Rank #2 (BUY) Carvana’s case, consensus EPS estimates suggest mid-double-digit growth over the next three quarters – a dramatic improvement versus the negative growth from the previous three quarters.
Image Source: Zacks Investment Research
Know the Market Environment
The last two years are proof that, most of the time, the market environment matters and is cyclical. For example, while tech was melting down in 2022, dividend and old-economy stocks outperformed. In 2023, the trend has cycled back, and non-dividend-paying stocks outperform dividend-payers.
Image Source: GFD
Cathie Wood’s active ARK Innovation ETF (ARKK) is a prime example of the move back to growth and innovation over safety and stability. Some of ARKK’s largest holdings include unprofitable yet highly innovative companies such as Unity Software (U), UiPath (PATH), and Coinbase (COIN). Earlier this week, ARKK emerged from a multi-month base structure and hit fresh 52-week highs.
Image Source: TradingView
Know your Mandate
Your investments should fit your personal goals. If you’re running a long-duration retirement portfolio, continuously adding to dividend payers almost always makes sense. Conversely, if you are actively trading and attempting to outperform the market, you can venture into high-performing momentum stocks that outperform in the current market. As always, risk mitigation is paramount, and combining both strategies can produce strong results.