In his popular book The scout mentality, Julia Galef offers an insightful test of whether we process new information with an open mind. For statements that support your belief, ask yourself, “Should I believe this?” or ask yourself, “Is it true?” This is as applicable to stocks as anything else.
Many shareholders of You’re here (TSLA 5.61% ), AMC Entertainment (AMC 0.04% ), GameStop ( GME 3.47% ), Airbnb (ABNB 2.28% ) and Reached ( UPST 4.42% ) cling to stories of how things can go well. But there are many things that can go wrong. Caution is advised for these popular stocks. Here’s why.
Don’t make a mistake. Elon Musk has proven the doubters wrong. Tesla has increased production by 74% per year since 2017 and 83% in 2021 alone. Operating cash flow nearly doubled in 2021, and the company appears able to finance itself after diluting its shareholders 28% over the past five years. After years of skepticism, Tesla now competes BMW for the highest operating margin in the industry.
Given that it grossed nearly $54 billion in revenue in 2021, you might be surprised to learn that the electric vehicle maker still isn’t among the top 15 automakers in the world. He sold about a tenth of this Toyota did. Shareholders are betting on his rise in this list.
Even if it can reach the total volume produced by Toyota with its current vehicle mix, maintain the profit margins of BMW and collect the valuation of Apple by the end of the decade, shareholders may not realize much return. Meeting those criteria would push Tesla’s market capitalization to just over $1.5 trillion, or about $1,500 per share without further dilution. It’s a lot. But that would represent a return of only 4% per year. The company has proven itself. But a lot of future success is measured in actions. Buyer beware.
2. AMC Entertainment
AMC shareholders probably thought they had already memorized all the bad news about the company. Movie attendance is still about half of what it was before the pandemic. Shares outstanding have increased fivefold. He’s still burning cash and has nearly $11 billion in debt. Despite all of this, stocks are up 1,000% since the start of 2021.
If that doesn’t scare you, what about CEO Adam Aron – who collected $21 million in compensation in 2020 – buying a minority stake in a gold miner that appeared to be bankrupt? Now, the junior mining company won’t have to repay its debt until 2027. That could turn out to be a stroke of genius. But there’s a reason Wall Street generally doesn’t like surprises. If I am going to invest in a company, I would prefer to know what company it is. Anyone putting their money on the line with the business needs to be honest with themselves about what they think the future holds and how likely it is to happen. It can turn out to be a great investment. But that would mean beating the odds.
Similar to AMC, GameStop shares are up 77% since the start of 2021. Last quarter’s revenue topped the same period of 2019. It’s a good sign the company is headed in the right direction. . It has significantly reduced its debt, but the company was still burning cash in the last quarter. It raises the prospect of repeating the shareholder dilution that happened in 2021. It may also need the cash to continue its push toward non-fungible tokens and blockchain gaming as well as to open new offices in cities. technology friendly.
It’s intriguing. It’s the kind of twist that has a chance of being one of the books to be written about. But the price-to-sales (PS) ratio is 25 times higher today than it was before the pandemic. And Chairman of the Board Ryan Cohen – who continues to play the role of populist leader to his meme-share fans – seems to be as interested in his public profile as the company’s. Some might ask, “Why not?” It worked for Elon Musk. But for my investment dollars, the risk/reward ratio is still not tempting.
When the company started, it offered travelers a cheap alternative to expensive hotels, especially when rooms were hard to come by. What started as a way for normal people to make extra money by renting out space in their homes has turned into a $110 billion business.
Although it looks alike, this company has changed over the years. Shrinking cities led to the collection of more taxes, and the professionalization of short-term rentals – and associated fees – reduced the price advantage. It still offers the possibility for short-term tenants to find accommodation at many different prices. Flexibility has been highlighted during the pandemic. During the last quarter, more than one in five reservations were for 28 days or more. Business is good.
But several recent news items have the potential to make people think twice about logging on to the platform for their next trip. In one, a man in Texas was accused of checking in people staying at his Airbnb. Police found more than 2,000 photos of guests in their most intimate moments. In another, a couple discovered they had been registered and sued the company. The dispute was to be referred to an arbitrator in accordance with the terms of service of the lease agreement – a win for the company.
Problems with undisclosed cameras in rental properties have been known for years. And the company has taken steps to try to crack down. But many say the company has done more to protect itself than to protect its customers. As stories like the recent ones become mainstream, it could damage the brand beyond repair. At the very least, this could entice many potential guests to try traditional hotels again. And at this point in its life, anything that hinders Airbnb’s growth will crush the stock price.
Credit scores have long been an opaque assessment with a major impact on people’s lives. CEO Dave Girouard and his team set out to create an alternative using machine learning, and by all accounts, they succeeded. The Consumer Financial Protection Bureau studied its loans and found that Upstart was able to approve more loans than traditional loan models at a lower interest rate. This opens the possibility of lending to millions of people who did not have access to it before.
It has been popular with its banking partners. Revenue for 2021 increased 264% over the prior year. And the company has made a profit for each of the past two years. Its ability to partner with lending institutions – rather than being a lender – has been key to its success. But this does not mean that it is not exposed to credit risk.
Many loans made by its banking partners are bundled together to be sold to investors – or securitized. It is a financial buffer that requires the loans to generate enough profit for the lenders, Upstart, as well as the investors who purchase the loans in the capital market. The Great Financial Crisis showed that even if the securitization process ran freely, the fear of defaults could make people cringe. I think Upstart has a better chance than not of succeeding. But it is a risk that those who own the shares should be careful to weigh.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.