Internet stocks? However high, watch for profitability, first

When markets become very exciting, I always worry for small time traders when certain stocks rise up very high. Seriously, profits for companies do not suddenly change and thus the share prices should not suddenly increase for no apparent reason beyond expectations or sentiment. This is even more so for internet / online counters. Do note that there are internet giants which are profitable and if I may say some are very profitable. Google and Facebook, for example would be these very profitable companies. Apple is another very profitable company even if it’s losing market share in the smartphone business. Right focus matters, really.

However, there are many internet / online companies which are already way over 5 years old and has YET to turn a single annual profit. The argument? It’s focusing on market share. How are some of these companies gaining bigger market share? Sorry, it’ not based on service. It’s merely using ever more money to subsidize ever more new customers. The hope is that the competitors would somehow lose more money and close shop leaving the market with just one player. At that time, this remaining player can start charging more to go into profitability. Absurd idea to say the least. So, please STOP buying all these unprofitable and yet highly valued companies regardless of their brand name. Else, just hope that more new investors would continue to invest because just like the tulip mania, everything may just disappear when people realised that there is no basis for such a high price. Read about what is tulip mania here. 

Oh yeah, there’s a piece of news about internet counters here; TheStar. It tells of both the really profitable companies as well as some of the above which is still saying that their focus is on ensuring they have biggest market share, then somehow profitability will happen. Another piece of news here in Bloomberg which tells about how even the biggest brand names that we know may still be suffering huge losses every quarter. To those who are now asking, if these companies are suffering huge losses every quarter, how could they continue operating? Well, there are institutional investors… remember? Instead of putting their money into fixed deposits in some of these advanced countries paying close to zero returns, they would prefer to bet on potentially profitable companies. It’s considered a bet because most of the companies that venture capitalists invest in will never be profitable. That one that got profitable? It would provide returns which is more than the money they lost in majority of all the internet companies it invested in. As for all small traders like most of us, let’s keep this in mind always. Happy investing.

written on 6 June 2017

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