Remember this 'traditional' approach while investing in new-age stocks like Zomato, Paytm The companies that manage to make money will come out stronger, and those that cannot, will die
Dhirendra Kumar
CEO, Value Research
Suckers’ rally. This is not a term that is often used in Indian investing circles, but the phenomenon is common enough. The meaning should be obvious and self-explanatory, but let’s define it to be sure. A ‘suckers’ rally’ is a short-lived and unjustified increase in the value of a stock or the entire market. This brief uptick often lures uninformed investors. These investors are the ‘suckers’ who are bound to suffer losses when the brief illusion ends.
In recent months, hope has been bubbling around the world that digital businesses, which earlier appeared to be perennial lossmakers, may be able to make profits at some point. This hope has mostly been triggered by the build-up of the first quarterly profit that Uber has turned in. This, along with an apparent improvement in the basic numbers of some digital businesses, has led to a rally in some of these stocks. It’s a curious situation that the supposedly improving prospects of a cab-hailing service worldwide can make people hopeful that the stock of a payment company or a food delivery business might be a good buy. Still, this is the kind of hope that large parts of the markets now run on.
Of course, ‘digital businesses’ should not be a category in itself because practically every business is digital nowadays. So which is this category, and what’s common among these businesses? For an investment analyst like me, the most remarkable thing is the paucity of profits. Profits are central to a business; without profits, there is no survival. I’ve been analysing stocks since 1991, and I find it unbelievable that, in 2023, I have to say this. For, as long as people have done any kind of business and invested in them, we have all known that profits are a must for survival, and the sooner a business becomes profitable, the better it is. What’s more, the ratio of the capital that a business has employed to the profit it makes, is also important. In this context, it’s interesting that Uber has used up US$25 billion to turn in its first quarterly profit.
For some years, the belief in the supremacy of profits had become a marginal view. Many people, especially in the media and social media, had started believing that profits were optional, and what was important was adhering to ridiculous metrics like being a unicorn. For a while, these ideas also infected the ‘real world’, that is, the equity markets. However, the wave of digital IPOs of companies like Paytm and Zomato, among others, has left the markets littered with profitless zombie stocks.
This has also brought a certain amount of reality back in investors’ attitudes. Till just a few years ago, a business that was making losses, especially big losses, would have to quickly find a way to profitability, or shut down. Such businesses would have no way of continuing to operate. The days of profit-making companies growing their businesses and loss-makers shutting down seemed to have been over. But, maybe not. A business needs money to survive. This can come from revenue, or from investors. It’s clear what has changed now is the fact that the free flow of zero-cost dollars has been shut off from the US economy. As should be obvious to anyone observing such businesses, this tightening of money flow is the best thing that could have happened to these digital businesses, and to investors. The prospect of tight money has made these companies focus on profitability.
The companies that manage to make money will come out stronger, and those that cannot, will die. This is precisely what happened in 2000-2. The Amazons and Googles survived and flourished, while those like Pets.com, Webvan, and Boo died. We’re possibly seeing the same story play out again, and it’s good for all of us. It’s crucial for investors to remain centred on the traditional, proven methods of investment grounded in sound fundamentals. Profits appear to be back, but, in fact, they had never actually gone out of fashion.
(The Author CEO, VALUE RESEARCH)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
