The New Tech Bubble: Beware the Unprofitable Tech Stock
Tech stocks have been the darling of Wall Street this past year, but many have been warning for quite some time that it’s a bubble waiting to burst.
Economic pick-up coupled with an increase in inflation have created a ripe environment for the Fed to do something it hasn’t done in a long time — raise interest rates. And higher interest rates are about the only thing that seems to be able to stop the tech boom after a year of riding the bull equity wave.
But a worrying trend has taken over tech stocks in the last couple of years. Companies have seen over-inflated valuations but are yet to remain profitable for consecutive quarters.
Crunchbase took a look at a sample of 12 venture-backed, recently public companies, including the most highly-valued market entrants, and showed that three quarters posted losses in excess of $100 million despite much larger valuations.
Palantir was a much-anticipated offering for 2020 but posted $180 million in losses despite its $76 billion valuation and revenue of $1 billion. Forbes reported, “Palantir does look expensive at current valuations trading at over 30x projected 2021 Revenue presently” back in January.
Palantir CEO Alex Karp addressed the company’s shortcomings as temporary, telling clients on a company earnings webcast reported by CNBC, “We hope those of you on this call who are current investors stay with us and those of you who prefer a more short-term focus, that you choose companies that are more appropriate for you.”
The confidence in the tech sector being vital for long-term social and economic stability has fueled its valuations over the last couple of years, but the question remains as to where, exactly, these companies should fall in price relative to what they are producing for their markets overall.
It can be difficult to justify expensive stocks, and reasons to hold them, when other stocks and sectors have delivered both profits and dividends in the same year and also show long-term value. Netflix, Costco, Walmart, Nike and Farfetch are all companies that delivered profits to their shareholders this year while showing long-term staying power.
For example, had you bought Farfetch Limited in November 2020, you would have paid around $37 per share. At the same time, Palantir was trading for around $29 per share. Since then, Palantir has steadily lost value after some brief highs of about $39 in February. The company had net losses for 2020, and as of today, shares are down to $23. Farfetch, on the other hand, which provides clothing online, is up to $51 per share and posted profits for 2020.
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