In the US Twitter the micro blogging site has reported losses of £395
million in 2013 compared to losses of £49 million in 2012.
It has been
estimated that 68 percent of last year’s IPOs were also losing money.
In the UK
there is a similar example, Ocado the on-line grocery delivery service saw sales up by
17% with losses to December £12.5 million compared to £600,000 year before.
Correspondingly the share price in past year rose from 102p to 522.p.
Based on their history, there is no basis for concluding that these
unprofitable companies will ever make money.
That’s the stock in trade for a company about to float whilst losing
money. If it were making a profit before its IPO, it would be harder to make
bullish forecasts about how much profit the company will generate in the
future.
Ironically for a company losing money, the sky’s the limit when it comes
to predicting how bright its future revenues will be.
In tandem with the ability to forecast a spectacularly profitable future
is the functioning of one of the market’s most basic laws: momentum. In other
words powered by its own performance a stock that is gaining value up will
continue to appreciate in value just because it is going up.
More specifically, when there is no real positive cash flows on which to
value a stock, its price will rise because investors who do not own the shares
will want to climb aboard the bandwagon rather than miss out.
This wave of “new buying” can help to drive up the shares further, which
will attract a new buyers creating a dangerous bubble.
It would probably be a more prudent strategy to avoid the money-losing
IPOs and invest in companies who are making a profit before they try and float
their shares.
However forecasting the price of stocks remains an inexact science and
unfortunately for the investor there is as yet no failsafe basis on which to
explain why stocks go up and down.
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