Strategizing a Subpar Investment in the Stock Market
Ditching the idea of a guaranteed stock market win, let's focus on some surefire ways to lose your hard-earned money. One promising path to financial ruin is investing in a stock priced at 100 times or more than its revenue.
General Motors, McDonald's, and even Tesla will only cost around 13 times their revenue at most. However, some investors fall victim to the allure of overpriced 'hope' or 'dream' stocks. These high-flying, popular picks can sell for an exorbitant multiple due to investor optimism.
To prevent you from becoming the next unlucky investor, here are five stocks worth avoiding:
Strategy Inc. (MSTR)
Currently trading at a whopping 139 times its revenue, Strategy Inc., formerly known as MicroStrategy Inc., is based in Tysons Corner, Virginia. Run by CEO Michael Saylor, the company specializes in business software yet has reported losses in four of the last five years. Its fortune lies in its Bitcoin hoard of over 478,000 coins, currently worth around $47 billion. However, the stock's market value is higher, reaching approximately $87 billion. This disparity might lead you to ponder why investors would purchase the stock instead of simply buying the coins. While some reasons for this choice may exist, I view it as a risky, unwise gamble.
IonQ (IONQ)
IonQ, a College Park, Maryland-based company, sells access to quantum computers and is working on improving such devices. According to IBM Blog writer Josh Schneider, quantum computing uses unique qualities of quantum mechanics and will soon solve complex problems that supercomputers can't. IonQ's revenue for the past four quarters was around $37 million, but its market value exceeds $8 billion, yielding a price/sales ratio of 210.
Revolution Medicines (RVMD)
Redwood City, California-based Revolution Medicines is working on a novel type of cancer therapy, blocking uncontrolled cell growth by altering specific genes, known as RAS genes. All 15 Wall Street analysts recommend the stock, with many of them advocating strongly for it. However, the stock's P/S ratio is a mind-boggling 8,000. I consider this highly speculative stock an unnecessary gamble, especially given the track record of many promising oncology stocks' failure to thrive in the past.
Trump Media & Technology Group Corp. (DJT)
President Donald Trump's nascent business, Trump Media, boasts an impressive P/S ratio of over 1,600. Given that Revenue in the past four quarters was less than $3 million, the value appears unreasonable. I suspect that many buying the stock are doing so to express their political preference through their investment choices, rather than basing their decision on a financial analysis.
AST SpaceMobile (ASTS)
Operating since its 2021 merger with a special purpose acquisition company (SPAC), AST SpaceMobile's stock was nearly worthless until mid-2021, when the company signed an agreement to provide satellite service to AT&T's mobile phone network. The stock soared, surpassing 800% growth. Analysts predict enormous revenue growth for the company in the coming years but caution that profitability may not be realized until well into the future. The stock's current P/S ratio is an eye-watering 1,800, signaling investor enthusiasm considerably exceeding the company's current revenue performance.
In my 19 previous columns on high P/S stocks, I cautioned against 84 such investments. In 15 instances, the stocks I warned against performed worse than the S&P 500 Total Return Index over the subsequent 12 months, with 13 of the 84 stocks posting losses. Keep this in mind as you weigh your investment decisions and tread carefully in these high-risk, high-reward territories.
- Speculators have been warned about the extravagant valuations of some stocks, such as Trump Media & Technology Group Corp. (DJT), which currently trades at over 1,600 times its sales.
- Despite its high price/sales ratio of 210, IonQ, a quantum computing company based in College Park, Maryland, continues to attract investors due to the potential of quantum computing to solve complex problems.
- Strategy Inc., formerly MicroStrategy Inc., with a CEO named Michael Saylor, has a P/S ratio of 139, making it an expensive investment option, especially considering its losses in four out of the last five years.
- Ast SpaceMobile, formerly a SPAC, has seen its stock soar due to a partnership with AT&T, but its current P/S ratio of 1,800 is a red flag, suggesting that investor enthusiasm greatly exceeds the company's current revenue performance.
- Revolution Medicines, with its focus on cancer therapy, has a P/S ratio of 8,000, making it highly speculative, especially considering the track record of many promising oncology stocks.
- Microstrategy, once a reliable investment option, now trades at a whopping 139 times its revenue, leading many to question the rationality of investing in such highly-valued stocks.
- AST SpaceMobile, while promising revenue growth, should be approached with caution due to its high P/S ratio, which suggests that investors may be overvaluing its current performance.
