Some were more willing to wait to see what could happen (on WPRT). Some did not want to wait. It was a coin flip. Some said sell earlier and some said it later. On hindsight, the ones who said to sell earlier got their lucky call.
Oh tj, you are SO wrong! This wasn’t a coin flip, and it wasn’t hindsight, and it wasn’t a lucky call. It was impossible and I tried to show them why.
The quarter I looked at it, WPRT had $30 million in revenue, and $36 (I think) million in losses. That means they took in $30 million and spent $66 million. That’s such a huge loss that there was no way they could get to break-even!!
Their gross margins were about 27%. That means of every $100 in revenue, $73 went to cost of goods sold and $27 was available to reduce losses.
So, if they doubled revenue to $60 million the next year, they would only have 0.3 of $30 million, or $9 million, towards reducing losses (I’m giving them 30% gross margins on higher volume). If SG&A stayed the same, they’d still lose $27 million dollars.
If they made $60 million more and tripled their revenue, they’d reduce losses by 0.3 of $60 million or $18 million, and still have another $18 million in losses remaining. And that’s assuming they could triple revenue and not increased fixed costs at all (which was clearly wishful thinking).
I figured they’d have to quintuple revenue (up 400%) to possibly break even (not make a profit), and management was proudly predicting revenue up all of 15%(!) the next year. Was it a “lucky call” to avoid that? Was it “hindsight”? Was it a “coin flip”? I posted all this on the WPRT board, at the time, by the way, so it’s not hindsight!! (MF ignored those calculations).
Saul
33 Likes
Please note that this is entirely different than a company with $30 million in revenue and a $3 million loss. that company’s expenses are $33 million and revenue is $30 million. They can thus conceivably break even in a couple of quarters with just a 35% increase in revenue. Or, if it’s a software company with 90% gross margins they can possibly do it next quarter with an 11% or 12% increase in revenue. WPRT, on the other hand, had revenue of $30 million and expenses of $66 million, and was manufacturing large engines. That’s not a coin flip.
Saul
2 Likes
Saul-
I can’t disagree with you on the numbers. They looked ugly and they still look ugly or uglier.
But at the time the bet was on a sector transforming potential and it was maybe a bit opened ended. Certainly you said you did not believe in this potential and you would have not bought in at all (or you would play the sector with one that already has profit).
I think you would not have bought into AMZN back at the end of the 1990s. That one was a great one and a rare one. So was Neflix if you bought in earlier in the 1st decade. Those are era defining and era changing businesses. They come from nowhere to become giants. You will never identify those only by looking at their present numbers.
Certainly you can say that MF is trying to hit some that will bring extraordinary returns for their pick list, and you would not blame them to trying. For people who wants to earn some money from the stock market, WPRT did turned out to be a waste of time and money.
I still maintain no one could have seen that outcome 3 years ago. It could have been different.
tj
2 Likes
Hard to imagine how WPRT could have had a story with the exponential of an early AMZN or NFLX though. Maybe I’m not familiar enough with the company and I never invested in it, but it didn’t have the numbers and doesn’t seem like it had an exponential growth story possibility anyway
1 Like
But at the time the bet was on a sector transforming potential and it was maybe a bit opened ended. Certainly you said you did not believe in this potential and you would have not bought in at all (or you would play the sector with one that already has profit).
I think you would not have bought into AMZN back at the end of the 1990s. That one was a great one and a rare one. So was Neflix if you bought in earlier in the 1st decade. Those are era defining and era changing businesses. They come from nowhere to become giants. You will never identify those only by looking at their present numbers.
Note that you can always wait for transformational companies to actually grow earnings as they transform. You don’t have to get in at the beginning. What if you had waited to buy Netflix or CMG or many others until they had 4 quarters of positive earnings growth? Answer, you would have still gotten in with plenty of time to spare and large profits to follow. That is the main point.
If you do want high spec stocks like WPRT, go very light as they get by on hope, then load up when they start showing real earnings. MFSA says hold 3-5-10 years. If a stock is going to be good for those last 7 years, it will have earnings.
Is that much different than what Saul is saying?
8 Likes
I think you would not have bought into AMZN back at the end of the 1990s. That one was a great one and a rare one…era defining and era changing businesses. They come from nowhere to become giants
Hi again tj,
Of course I got into AMZN back at the end of the 90’s. I got out though when Bezos kept saying “Our stock is way overvalued!” It lost 93% of its value by mid-2001! 93%!!! You may think:
That one was a great one and a rare one.
However, it lost 93% of its value by mid-2001! 93%!!! That’s 93%!!! It took almost 10 years (mid 2009) until it finally passed where it had been in 1999 for good.
I also was in YHOO and AOL and got out in early 2000. They certainly looked pretty “sector-transforming” too at the time. They lost 95% of their value and NEVER came back. They sure seemed to be era defining and era changing businesses that come from nowhere to become giants.
I think I’d rather not place my bets on which stocks will become giants, when they are at very high PE’s and have very small earnings.
Saul
4 Likes
“I think I’d rather not place my bets on which stocks will become giants, when they are at very high PE’s and have very small earnings.”
Saul,
This post, #15412, should be passed down to our children and grandchildren. Perhaps placed in our wills. It would save them a lot of money in their future investments. Truly a gift that keeps on giving.
I lost a lot of money in the dot com bust.
Bet I’m not alone.
Jim
3 Likes
TJ,
A company’s business model makes a big difference. WPRT could have built the best damn natural gas engines in the world and sold them for cheap (compared to gas or diesel) and still have gone no where (and in fact, maybe they did). But in order for them to succeed there are a whole raft of adoption hurdles that must be passed which are completely beyond their span of control. Where do you get LNG? What if you have a breakdown, where do you find a competent mechanic with all the right tools? Etc., etc., and so on.
Amazon, on the other hand had only to transform a wide spread and totally familiar experience (shopping, or initially book buying), to a more convenient way of conducting this transaction.
Why was book selling the first thing Amazon went after? Think about it, how much comparison shopping is involved in buying a book? Virtually none. OK, hardcover versus soft cover. That pretty much covers it. Amazon did not have to convince the shopper that buying TV on-line was equivalent with going to a store. Numerous points of comparison. And looking at an on-line image of what you might see on a Samsung versus a Sony is not the same as actually seeing the TVs side-by-side. And you can’t determine how comfortable a pair of shoes might be by reading someone’s review.
Books on the other hand do not rely on a first hand experience to gain comfort and confidence with the purchase. It’s the same book that you might buy from Walden, only cheaper and it’s delivered to your door. The only real difference is if you are willing to wait a few days for shipping (there was no reasonable overnight shipping initially). But unless you’re a student, there is seldom a huge urgency with a book purchase.
1 Like