Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue…

As someone who’s been involved in this business for many years, one thing that never surprises me is that people make the same mistakes over and over again.

Taking a look at different sectors, it’s quite interesting to see how market sentiment has gotten so poor in one area but is so exuberant in another. The funny part is that corporate earnings appear to have nothing to do with the current level of market sentiment.

Investors who have been in the markets for a while will remember the “dot-com” bubble of the late 90s. During that time period, market sentiment for any stocks that had “.com” in the name was through the roof in optimism. Sure, the stocks had no corporate earnings or real path to generating corporate earnings, but the web sites had plenty of viewers.

It’s too bad that views on a web site don’t translate into corporate earnings or cash.

Also Read: NYSE Holidays 2014

We all know what happened next: reality eventually hit market sentiment, and these high-tech flyers crashed hard.

Ah, but this time is different, you might say.

It is true that many of the high-tech companies are extremely strong fundamentally, generating high levels of corporate earnings, including firms like Google Inc. (NASDAQ/GOOG). However, it appears we are reaching a level of market sentiment frenzy in technology stocks that I haven’t seen since the late 90s.

The latest example is a report that the company Snapchat, Inc. has just secured an additional round of financing that values the company at $3.6 billion! (Source: “Snapchat Is Mulling Another Huge Round at a $3.5 Billion Valuation,” AllThingsD.com, October 25, 2013.)

You might ask, what’s wrong with a $3.6 billion valuation for a company?

Valuing a private company can be difficult, especially one that is growing revenue and corporate earnings. However, there’s one slight problem with trying to value Snapchat: it has neither revenue nor corporate earnings! (That’s not a misprint.)

While the firm is private and we don’t know for sure, sources say the company essentially has no source of revenue. That’s right; the company with absolutely no revenue and certainly no corporate earnings is being valued at $3.6 billion. Yet companies that actually make products and sell them are seeing market sentiment decline and their stocks languish.

Perhaps I’m a bit old-fashioned, but I like investing in companies that actually generate revenue and even corporate earnings. But my point is not to be negative on Snapchat; I certainly wish the company all the best. I’m simply trying to point out that market sentiment has gotten skewed, as investors have moved away from looking at fundamentally strong companies that actually generate corporate earnings to simply gambling and hoping that the next high-tech company can quickly give them a profit.

Just as we saw over a decade ago, this type of short-term thinking does not work. To see the stock price collapse in companies with no corporate earnings won’t surprise me. However, at some point over the next decade, we will see fundamentals emerge and the focus will once again be on companies with strong corporate earnings. Of that I am certain; timing it is a whole other matter.

With the market at multiyear highs and more firms reporting trouble generating corporate earnings growth, I really don’t believe the answer is to start looking for firms that have no potential for generating real revenue or corporate earnings.

As a long-term investor, these types of stories worry me, as they indicate that market sentiment is beginning to become frothy. Calling a market top is always dangerous, as the market can continue being irrational for some time. Don’t forget, the bubble in the dot-com stocks lasted for several years.

I would look to begin raising cash by getting out of the highflyers that have outperformed this year. I would also look at the market laggards. One sector that has been hammered over the past year has been mining stocks. I think over the next decade, it’s far more likely that mining stocks will still be around as compared to some company that makes an application for teenagers to take pictures of themselves.

This article Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue… was originally published at Investment Contrarians

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