There are many stocks in the market today that are trading at jaw-dropping market caps despite not showing a single dollar of profit yet. Some are clearly purely speculative and their high valuations irrational. But to say that of all loss-making companies would be an oversimplification — and plain wrong. Read our article next week for a follow-up on this.
There is never any shortage of debate when it comes to stock valuations. What is a fair price to pay? When is a stock too expensive? Are current valuations irrational and in bubble territory? Or indeed, can a stock be super “cheap” when the company is loss-making and trading at a price-to-sales (PS) of 10 times?
All these questions are, to a certain extent, subjective. Even if every analyst uses the exact same methodology, the answers will still be different because they all require making assumptions about the future. The task becomes significantly harder for start-up companies during the early years, when their business models are largely unproven and most of them are likely to be loss-making.
