June 1, 2017
Uber reported yesterday that its NET LOSS totaled more than $700 million last quarter, despite pulling in a whopping $3.4 billion in revenue. (This means they spent at least $4.1 billion!)
That’s the latest in a string of massive, 9-figure quarterly losses for the company.
The only question I have is-- how much cocaine are these people buying?
Seriously, it’s REALLY HARD to spend so many billions of dollars.
You could have over 100,000 employees (-real- employees, not Uber drivers) and pay them $150,000 EACH and still not blow through that much money in a single quarter. Even if you think about Research & Development, Uber still managed to burn through almost as much cash as NASA’s $4.8 billion budget last quarter.
The real irony is that this company is worth $70 BILLION. And Uber is far from alone.
Netflix is also worth $70 billion; and like Uber, they can’t make money. Over the last twelve months Netflix burned through over $1.7 billion in cash, and they made up for it by going deeper into debt.
The list goes on and on-- Snapchat debuted with a $30 billion valuation after its IPO, only to subsequently report that they had lost $2.2 billion in the previous quarter.
Telecom company Sprint is still somehow worth more than $30 billion despite having over $40 billion in debt and burning through more than $6 billion over the last three years.
And then there’s Twitter, a rudderless, profitless company that is still worth over $13 billion. This is pure insanity.
If companies that burn through obscene piles of cash and have no clear path to profitability are worth tens of billions of dollars, it seems like any business that’s cashflow positive should be worth TRILLIONS.
None of this makes any sense, and investing in this environment is nothing more than gambling. Sure, it’s always possible these companies’ stock prices increase even more.
Maybe Netflix and Twitter quadruple despite continuing losses and debt accumulation. Maybe Bitcoin surges to $50,000 next month.
And maybe the Dallas Cowboys finally offer me the starting quarterback position next season. Hey, anything could happen. Call me old-fashioned, but I focus heavily on risk.
Remember Rule #1 in investing: don’t lose money. Rule #2? See rule #1.
It’s hard to abide by rules #1 and #2 if you buy expensive, popular investments that lose tons of money and don’t have a strategy to turn a profit. There’s risk in EVERY investment. There’s risk in buying Apple stock. There’s risk in buying government bonds.
There’s risk in holding your money in a bank. There’s risk in stuffing cash under your mattress. There’s risk in doing nothing at all. The idea is to invest where risk is low, while the potential for return is still high.
One of the best ways to do that is to patiently buy high quality assets for a deep discount.
Buying anything at a discount makes sense to anyone. People like discount clothes, discount cars, discount airfare. Even in certain investments like real estate, investors look for bargains… like picking up a great home in a great neighborhood at a discount price because of the seller’s divorce or financial hardship.
But with stocks, this bias towards discounts tends to go out the window. Granted, it’s a lot harder to find discount stocks these days given that just about EVERYTHING is in a bubble.
But if you have the right knowledge and you’re willing to put in the hard work and long hours, you’ll find hidden gems.
Here’s a great example: My colleague Tim Staermose recently came across a large company based in Hong Kong that he just recommended to readers of his 4th Pillar investment newsletter.
First are foremost, the company is profitable. It has a 13-year history of profitability and a lengthy track record of paying dividends to its shareholders. Most importantly, the company is deeply undervalued.
Just like buying a great house for less than its market value or construction cost, the company’s stock is selling for a steep discount below what its assets are worth.
To give you an idea, the market value of the entire company currently 25% LESS than the amount of net CASH they have in the bank.
It’s like buying $1 and paying just 75 cents. And that doesn’t even begin to include all the other high quality assets the company owns, or the fact that they’re consistently profitable and pay dividends.
(4th Pillar subscribers: Remember that the next dividend will be paid to everyone who is a shareholder by Friday June 2nd. So act quickly if you want that dividend.)
Just as assets can sometimes be absurdly overvalued, it’s also possible for assets to be astonishingly undervalued.
This means that there’s an obvious catalyst for growth. If the market does nothing else but bid up the stock price so that it’s back in line with its cash value, that’s good for a 25% return.
(This is why Tim’s recommendations of deeply discounted companies routinely earns his subscribers 90% or more.)
Most importantly, though, when you’re buying a profitable company for less than the amount of cash they have in the bank, it’s pretty hard to get hurt.
In other words, the risk is much lower. And I’d much rather make a 25% return without a ton of risk than gamble on the stock price of a profitless company.