Dot-COMs are back! And they are profitable!
Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Remember the dot-com crash of 2000? Back then, everyone talked about them and how silly investors were to put money in companies that generated no revenues. The dot-com crash was the subject of thousands of articles and business school case studies. It seems like everyone had learned their lesson and went on with their lives. Right?
Not even five years later, News Corp paid $1billion for MySpace and Google (NASDAQ: GOOG) paid $1 billion for YouTube. Most recently Facebook (NASDAQ: FB) paid $1billion for Instagram. None of the acquired companies ever made money.
In fact, who needs profits? Workday (Nasdaq: WDAY) just IPO'ed and their SEC filing stated that they do not think they will be profitable in the foreseeable future. Yet, they have an $8 billion market cap. Investors buy stocks of money-losing firms like Cornerstone-on-Demand (NASDAQ: CSOD), hoping that they will profit at some point.
Are they bad deals? Should investors dump these stocks? Not necessarily. In fact in the short run, investors don't make money when companies turn profits. They make money when other investors inflate stock prices because they believe something will happen to these stocks. You buy stocks in order to sell them later, but very few stocks will deliver enough cash flow in their lifetime for you to profit.
Consider Groupon (NASDAQ: GRPN). Their financials made no sense even before they IPO'ed. Yet, investors inflated Groupon's stock to $25.84 before it fell to $4.80 a year later. Does the Groupon CEO care? No! He has over $1B in cash reserves and he already cashed out by selling some of his stock. Groupon doesn't pay dividends, nor will it ever do so. So, how will investors profit from it? By participating in a ponzy... err... stock speculation, because for every seller there's a fool who will actually buy.
There are lots of stocks out there that are like that. Zynga (NASDAQ: ZNGA) and Groupon (NASDAQ: GRPN) should have never IPO'ed. Investments like this were irrational from day one. Cornerstone-on-Demand (NASDAQ: CSOD) is irrational today.
My advice - see if the stock you pick passes the dot-com test. Look for profits. If the company lost more money than it has in cash reserves, run! But once you invest, realize that you are investing in a ponzy scheme and your only goal is to find the next fool to buy your stock.
dshlos has a long position on Facebook and no other positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!