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Why Are Investors And Wall Street Picking Up Unprofitable IPOs?

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The IPO market has always been interesting. IPO investors capitalize on high growth companies and might strike a fortune in the long-run if they stay invested in successful companies.

And they’re the ultimate cash-out play for VC investors that came in early. But even getting in early in the IPO stage can be insanely lucrative.

Example.

Facebook [FB] debuted on the stock exchange in May 2012 at $38 per share. The stock reached an all-time high of $218.62 in July this year, providing investors with a return of 475% in just over six years.

But few companies are as successful as Facebook. The social media giant had already reported a net income of $1B in 2010. Last year, the net income rose close to $16B.

That said, the trend this year seen an overwhelmingly large number of private unprofitable company hit Wall Street to major fanfare.

Over 80% of IPOs unprofitable

According to this report from the Wall Street Journal, 83% of IPOs listed in the United States in 2018 have lost money in the 12 months leading to their listing.

This number is even higher compared to the dot-com bubble, where 81% of IPO listing firms were unprofitable.

There are some investors like Kevin Landis, the chief investment officer from Firsthand Capital Management, who are wary about investing in loss-making companies. “The lesson from 2000 is don’t chase what everyone else is chasing,” he’s said.

Translation: Don’t believe the hype. But is he right?

These IPOs have generated significant returns

The report highlights that investors have been rewarded for pumping money into loss-making IPOs this year. The stock prices of money-losing firms in the United States have risen by an average of 36% this year.

Surprisingly, this is higher than the average stock returns of 32% for profitable IPOs this year. Compare this with the 10% returns of the S&P 500 ETF [SPY] and you know that the difference is huge.

Exponential returns by IPOs

Investing in companies is not always about profitability. Sure, everyone would like to strike gold by getting an opportunity to invest in a high growth and profitable company like Facebook.

Amazon [AMZN] which is the second largest company as per market cap, reported losses several years post its IPO. Amazon now consistently reports profits after it expanded into other business segments such as Cloud Services.

So what is it that attracts investors to these stocks? Investors are buoyed with the total available market opportunity of certain companies. They value revenue growth over net income and continue to pump in capital.

Investors hope that companies will turn profitable over the long run. Spotify [SPOT] was listed in April 2018. The stock reached an all-time high of $198.99, gaining over 33%. Investors believe the growth in music streaming to drive company revenue over the next few years.

The cannabis market is also estimated to reach $32B in 2020, up from $9.5B in 2017. This has driven the stock price of Tilray Inc. [TLRY] by 550% in less than three months. Eventbrite [EB] had a price and of $21 to $23 per share and the stock rose 60% higher on its first trading day.

Not every bet is successful

There is, however, a serious downside for investors of these companies in case it fails to meet analyst and investor forecasts. Snap [SNAP] has fallen close to 47% this year driven by a declining user growth.

The loss-making IPOs are generally overvalued due to optimistic assumptions and come crashing down if they fail to deliver. GoPro [GPRO] and Fitbit [FIT] are two such companies that have burnt significant investor wealth.

The last time investors were this optimistic about loss-making tech companies, it ended in a horrific bloodbath with the dot-com bubble. Let’s hope Wall Street is proved right this time around.

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This Year’s Hottest Tech Stock Is Getting Crushed

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Advanced Micro Devices [AMD] has been one of the top performing stocks for quite a while. This chip maker has been a money spinner for investors, gaining over 400% in the last 30 months.

The stock was up a mind-boggling 1850% between Nov. 2015 and Sep. 2018. However, AMD shares have declined close to 40% since the start of Oct. 2018, wiping out significant investor wealth.

So, does this mean AMD’s impressive stock rally has come to an end or is it another opportunity for investors to buy the stock? Despite the recent pullback, AMD is still one of the best performing tech stocks this year.

 So why did AMD shares plummet?

AMD has been a Wall Street favorite for a while. So what has been behind AMD’s wild ride in 2018? Chip redesign efforts have benefited the company, driving shares to its 10-year high. The stock rallied close to 300% in the first nine months of 2018 and is now up 85%.

The primary catalyst of the sell-off has been weak third-quarter results for AMD. While sales rose 4% to $1.65B, it was marginally below analyst estimates. AMD forecast revenue of $1.45B for the fourth quarter, which was a bigger miss considering estimates.

The broader tech sell-off witnessed in Oct. also contributed to AMD’s price drop. This coupled with a bear run in the crypto market leading to decreased demand have contributed to a weak earnings forecast.

In our Battle of the Stocks article published in Oct., we had outlined that NVIDIA [NVDA] was a better buy than AMD based on revenue and earnings growth metrics.

Chip revamp drove AMD to 10-year highs

AMD’s management oversaw the redesign of the company’s chip lineup and focused on improved product performance. There were encouraging reviews of AMD’s Ryzen chip for personal computers, Epyc chips for servers and Vega graphics chips.

Initially, sales rose 29% to $5.1B this year while net income rose to $299M, up from a net loss of $14M in the same period last year. However, a large part of this increase in sales was driven by the unsustainable boost in the crypto market.

With the crypto market declining 80%, this demand has also slumped for AMD chips that showed up in the company’s recent quarter. According to AMD, graphics sales in crypto mining accounted for 10% of sales in the third quarter of 2017. Comparatively, the crypto graphics vertical has contributed a negligible amount in Q3 2018.

Intel getting back in line

AMD’s rise in stock price was also driven by Intel’s CEO resignation in June 2018. Intel [INTC] has been struggling to revamp its manufacturing process for a while now. Earlier this year Intel also admitted that its much-awaited 10-nanometer chips will be available in large volumes by the end of 2019.

In fact, Intel’s 10-nanometer chips have been long delayed. The company was slated to launch them back in 2015. AMD’s shares spiraled upwards from $19 to $34 over the next few weeks post Intel’s announcement.

Investors expected this delay by Intel to drive incremental chip sales for AMD. However, Intel has now released information that it would launch chips that will be far ahead of competitor products.

Analysts believe AMD could not quite leverage Intel’s challenges to its benefit. In case Intel’s expected chip products make a strong comeback, AMD’s stock might decline further.

How do analysts view AMD?

The last time AMD’s stock rallied 1300% (between Oct. 02 and Mar. 06), the stock came crashing down and declined 96% over the next two and a half years. Piper Jaffray analyst, Craig Johnson stated, “History may not always repeat, but it does tend to rhyme…….These kind of parabolic advances really only end one way — poorly. From my perspective, I’m not chasing that stock here. I’ll wait for it to come to me.”

Some analysts believe the stock to be overvalued at current prices. It’s currently trading at 58x forward earnings way above the industry average of 14x. The 31 analysts tracking AMD, have an average 12-month price target of $24.17 for the stock. This indicates an upside potential of 27%.

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CRYPTO EXPERT: Top-Ranked Crypto Currencies You Should Bet On This Year

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In our previous post, we had seen that Marius Kramer outlined Binance Coin (or BNB) and Bitcoin as a safe bet in the crypto space. We also had a look at Kramer’s crypto portfolio allocation. Here, we look at cryptos that have the potential to replace Bitcoin.

According to Kramer, there are 6 primary blockchain characteristics required to replace Bitcoin. These include instant transactions, zero fees, scalability, decentralization, “Permissionlessness” and 1 millionth the energy usage of Bitcoin. The coins listed in this article have most of these characteristics and are in Kramer’s S-Tier (highly-ranked) category that includes Bitcoin.

The other cryptocurrencies in this category are Iota, Elastos, BAT, Enjin, Elixir, BNB and Dent. So if you have $10k to onvest, here’s how Kramer recommends allocating your investment in S-Tier coins.

Bitcoin ($3k)

Kramer states that though Bitcoin’s tech is pretty bad, it remains a top buy among institutional investors as it is still the most popular crypto. This might result in Bitcoin’s price rising to $50k in the near term. Bitcoin is down 8.7% in the last 12 months.

Iota ($1.5k)

Iota is one of the two cryptos that fulfills the above 6 criteria. It also offers decentralized storage. According to Kramer, “There is a lot of criticism towards Iota because it currently uses a coordinator to verify transaction before there are more nodes on the network, at which point it can be removed, so it’s not that big of an issue.”

Iota has risen over 34% in the last year.

Elastos ($1.5k)

Elastos is the other crypto to fulfill the above 6 criteria and is the way ahead of currencies such as Stellar, NEO, and EOS as they are centralized.

BAT ($900)

Batcoin is a crypto with the most real-world traction. It has over 10M downloads in just over 4 months. This crypto has risen 33% in the last week and 80% in the last month.

Enjin ($900)

Enjin Coin is a gaming coin with a network of 20M players and is integrated with the game Minecraft. This platform handles approximately 60M global views every month and accounts for sales of virtual goods worth amounting to millions of dollars. It is supported by a gaming-centric content management system and a dedicated e-commerce platform.

Elixir ($900)

Elixir is a leading platform with a market cap of just over $1M as they have not yet done an ICO (initial coin offering). The cryptocurrency has slipped over 90% since January 2018 and is an attractive buy according to Kramer.

Elixir has slipped 43% in the last year.

BNB ($900)

Binance Coin is the fee token of Binance and Kramer states that this is the strongest coin in 2018. This crypto has slipped 6.6% in the last month but is up by a whopping 443% in the last year.

BNB is less volatile in a market downturn and is a good hedge against smaller Bitcoin crashes.

Dent ($900)

Dent has also gained significant traction in the crypto space with over 2M users sharing, buying and selling mobile data around the world. It is on track to replace M-pesa and is rising in popularity in Africa.

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Money

Weekly Roundup: Top 10 Stories This Week

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Here are the top 10 highlights for this week.

1. REAL ESTATE: 20 Ways To Find Off-Market Deals

As the market heats up, it becomes more and more fashionable to find off-market deals.

But, not all “off-market” deals are worth buying. Even if 90% of off-market deals are a waste of time, that other 10% of the deals might sell well below market value, whereas anything listed online will definitely sell at market value. So, there is still some opportunity for money to be made. Here’s how.

2. 4 Smart Money Tips For The Holiday Season

With Thanksgiving break coming up, budgeting and planning your finances becomes vital. Here are some quick tips to help you make good financial decisions this festive season.

In order to avoid overspending this festive season, the best decision we can make is to plan ahead and make a budget. Here are 4 ways to plan your finances well.

3. If You Had Invested $1000 In Apple In 1980, Here’s How Much You’d Have Now

Apple – on Thursday – lost its $1 trillion valuation for a short time after its shares dropped 7% following a weak outlook. Fast forward to 2018, Apple in August became the first public U.S. company to hit a $1 trillion market cap. Apple’s journey, however, hasn’t been smooth. Here’s how much a $1000 investment in Apple in 1980 is worth today.

4. REIT Scorecard: Last Week’s Winners And Losers

With a difficult and dicey macro environment, how are REIT stocks faring? Are investors looking to diversify their portfolio and increase REIT investments in a volatile stock market environment? Here, we look at the top REIT gainers and losers over the last week.

5.Here’s How To Get A Mortgage You Can Actually Afford

Purchasing a home is exciting. After years of dreaming, you’re finally getting a place that you can call your own.

It’s really easy to get caught up in the excitement making you forget to ask one crucial question – how much “home” can you really afford? Here’s how you can get a mortgage you can actually afford.

6. INTERVIEW: Founder of $310M Clothing Line Bonobos On The Best Way To Raise Money (And No, It’s Not VC)

When Andy Dunn graduated from Stanford, the aspiring entrepreneur kickstarted a menswear company from his small apartment in New York. The clothing line, Bonobos, started off with a simple idea — selling chino pants.

Ten years later, the company was acquired by Walmart for $310M. According to Dunn, the key to raising funds does not always hinge on money. Here’s how he did it.

7.“Pump and Dump”, Explained

Pump and dump is a form of securities fraud. It involves artificially inflating the price of a stock by false and misleading statements. Here an investor or a group of investors promote a stock they purchased at a low price. They manipulate the share price and drive it higher to book significant gains. Read more.

8.Bitcoin Expert: Bet Big On These Cryptos

Despite the volatility in the cryptocurrency space, Marius Kramer, a writer and influencer on cryptocurrencies, has been bullish about two cryptocurrencies in the current market. The crypto market is down by 80% this year and investors have burnt significant wealth. However, this seems the right time to re-enter or explore the crypto market once again as the time is ripe for the next bull run. Read more on which cryptos could face a surge.

9.Another Stock Market Crash Looming Ahead?

Unless you have been on a deserted island with no form of communication, you would know that there is a lot of scare mongering around the possibility of another stock market crash.

Some people call it “terrible October” while others refer to it as “red October”, but any way you look at it, Oct. 2018 has continued to live up to its reputation as one of the most volatile months in the stock market. Read more.

10.Here’s How Apple Can Clinch A $2T Market Value

On Aug. 2, 2018, Apple [AAPL] created history as it became the first company in the United States to be valued at $1T as per market cap. Apple’s market cap rose to a high of $1.10T and has since slipped to its current valuation of $996.3B. Despite the recent slide, Apple shares are up 25.5% in 2018. Now that it has crushed the $1T barrier, what’s next for the tech heavyweight? What will be the next revenue driver for Apple? Can the company be valued at $2T? Analysts definitely think so.

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