Market mayhem: Buying stocks at 100x revenue

THERE are no sure things in the stock market. But here’s an almost sure thing: Investing in stocks that sell for 100 times revenue will lead you to grief.

I do an annual warning list on such stocks.

Tesla Inc. (TSLA), known as an expensive stock, sells for 8.9 times revenue. Microsoft Corp. (MSFT), one of the most successful companies in history, goes for 9.5 times revenue.

If a stock fetches 100 times revenue, investors are starry-eyed about its prospects. These are hope stocks, hype stocks, and in many cases, meme stocks (stocks popular with the self-described “Apes” on the Internet).

Biotech boosters

Today, there are 28 stocks with a market value of $1 billion or more that sell for 100 times earnings or more. Twenty-seven of them are in the health care sector and most of these are biotechs.

It’s not a mystery why. Biotech companies typically have little or no revenue in their early years, while they pour resources into developing a cure for one or more diseases. The research is exciting, the potential payoff large.

The ultimate success would be a cure for cancer. Someday, someone will find one. But the chances that it will be the company you invested in are small.

A century ago, cars were new and auto stocks were hot. Most fell by the wayside. The same thing happened with radio stocks. Similarly, picking the ultimate winners among today’s crop of aspiring biotech companies is a big challenge.

Virgin Galactic

Virgin Galactic Holdings Inc. (SPCE), the spaceflight company founded by British entrepreneur Sir Richard Branson, sells for 999 times earnings. It wants to promote space tourism, and you can book a ticket on a future flight for $450,000.

Its revenue in the past four quarters was $1.6 million. The stock’s market value is $1.75 billion.

Let’s suppose that eight years from now, Virgin Galactic has a weekly flight into space carrying 100 passengers, each one paying $450,000 for their ticket. That would be $2.3 billion in annual revenue.

Maybe you think those assumptions are conservative. I think they’re generous.

Would the company then be profitable? I doubt it, considering what Virgin Galactic will have to pay for rockets, rocket fuel, pilots and insurance.

Karuna

Karuna Therapeutics Inc. (KRTX) is the largest company by market value ($6.8 billion) that sells for 100 times earnings or more. Based in Boston, the company has a drug (KARXT) to combat schizophrenia and psychosis associated with Alzheimer’s disease.

KARXT is in late-stage clinical trials. The company will probably seek approval from the Food & Drug Administration shortly, and hopes to market the drug in 2024.

Reata

Reata Pharmaceuticals Inc. (RETA) has debt equal to 31 times stockholders’ equity. The company, based in Plano, Texas is working on antioxidant and anti-inflammatory drugs.

Except for 2014, when it recorded a profit of about $690,000, Reata has shown a loss every year. Losses have been widening and were $311 million in the past four quarters.

Past record

My warning list from one year ago contained three stocks. Rivian Automotive Inc. is down 69 percent since that list was published (February 21, 2022 through February 17, 2023). Intellia Therapeutics Inc. is down 53 percent. Arena Pharmaceuticals is up 7 percent.