Investing in unprofitable companies (loans, real estate, debt, buy)

[njbiodude]

I work at a publicly traded company where I can get stock options pretty soon.

I consequently bothered to read my employers quarterly statements and was surprised to see they had a pretty substantial net loss every quarter going back years. Interestingly, their stock has skyrocketed in the last year as our revenue has increased. Of course we're still losing millions a quarter.

It seems that looking at other similar companies in my industry that this is fairly common. The Bay Area is certainly full of unprofitable startups (Uber, Tesla etc).

I'm surprised investors tolerate net losses so well but it seems like all this "economic" growth is built on a facade of easy money.

Maybe I should just cash out those options as soon as they're available? It seems strange to hold a stock that's hemorrhaging capital.

[MrRational]

Originally Posted by njbiodude

I work at a publicly traded company where I can get stock options pretty soon.
Maybe I should just cash out those options as soon as they're available?

As soon as you're allowed to (read the fine print there as well).

[RationalExpectations]

The earnings number you're looking at - quarterly financial statements - might or might not be the best way to look at your company. EBITDA might be a better measure. It probably makes sense for you to look at Wall Street Analysts reports on your employer. Their entire job is analyzing your employer, its customers, it suppliers, its competitors, its market segment, and its ecosystem to come up with a view of the company's future prospects.

I always held my stock options until just before they expired (typically 10 years hence). It was a long-term bet on the growth of the market segment and my employer's share of that segment.

[SuiteLiving]

I would say it depends on your company. Usually the type of company you describe has a high beta stock, with lots of ups and downs. Watching for the trading range of the stock and ashing out in the upper end is usually a good strategy.

Additionally, what's your company's philosophy on granting options? Are they haphazard grants of a slew of options or is it an annual (or more frequent) grant? If it's the former, I've typically seen people cashing out when the runs in the stock price take place. If it's the latter, it's more typical to cash them out as they vest since you'll have a steady stream of additional options coming to ride any upside in the stock.

[RationalExpectations]

Just a note: check to see if they are actually stock grants rather than stock options. Some companies will issue you RSUs (Restricted Stock Units) which are not stock options.

[Mircea]

Originally Posted by njbiodude

I work at a publicly traded company where I can get stock options pretty soon.

I consequently bothered to read my employers quarterly statements and was surprised to see they had a pretty substantial net loss every quarter going back years. Interestingly, their stock has skyrocketed in the last year as our revenue has increased. Of course we're still losing millions a quarter.

I rarely give investment advice, but in your case, I will.

You say you're reading quarterly statements, which I assume is the 10-Q.

Good for you!

That's a good practice and you need to do that for every stock you hold, even the entities in your funds if you invest in those.

So, while you are doing good things, you're not doing everything you could do.

Originally Posted by njbiodude

It seems that looking at other similar companies in my industry that this is fairly common. The Bay Area is certainly full of unprofitable startups (Uber, Tesla etc).

It is neither uncommon nor unrealistic for any company -- corporate or private -- to operate at a loss for a period of time after start-up.

You should be reading the company's prospectus or business plan. That should state clearly how long the company needs to operate before it turns a profit, and that could be 1 year or 10 years. Most companies are profitable in 5-7 years, but it depends on the nature of their business.

You probably have access to documents the general public doesn't have, and you should be reading those, too, if you can.

Originally Posted by njbiodude

I'm surprised investors tolerate net losses so well but it seems like all this "economic" growth is built on a facade of easy money.

"Easy money" has nothing to do with anything.

The fact that a company is not profitable is not necessarily an issue.

So long as the company has strong revenues, increasing revenues and/or good cash-flow, it's not really a problem.

When the company has flat revenues, inconsistent revenues, declining revenues and/or cash-flow issues, it's a problem.

If you own stock, that would be a good time to bow out. If you're a member in a limited liability company, a partner in a partnership or a silent partner or investor (meaning you wrote a promissory note) you're going to want to start asking questions, and I don't mean talking to yourself or friends.

You need to direct those questions at management, because it might be a personnel issue. Not all presidents and CEOs are what they appear to be, and s/he might need to step aside and bring in someone else who knows what they're doing. It could be a lackluster sales force. It could be marketing and advertising. It's just the nature of the business. Some businesses can more than get buy with spending 1%-2% on marketing and advertising, while others need to spend 3%-5% and still others as much as 8%.

If you remember the dot.com thing, the fact that they were heavily indebted wasn't the problem. The problem was they were heavily indebted, had zero cash, had little to no revenues, no cash-flow, weren't going to substantially increase revenues or improve anytime soon and as a point of fact, had done nothing and had nothing to show for it.

That's when the people who know what they're doing pulled the plug and got out and everyone else panicked and followed suit.

There were literally thousands of companies whose names started with "i". It was "i-This" and "i-That."

It wasn't that they had a bad idea, it's just that they were a decade and a half premature.

Anyone who thought the Silent Generation was going to shop on-line was certifiably insane.

Originally Posted by njbiodude

Maybe I should just cash out those options as soon as they're available? It seems strange to hold a stock that's hemorrhaging capital.

What kind of Capital?

Cash?

If cash, what are they doing with it?

The first rule of investing is you don't buy stock in companies that don't have cash. That'll save you a lot of angst, not to mention your portfolio will do better.

Cash is everything. Cash is what allows you to fend off hostile-takeovers, leveraged buyouts and forced mergers/acquisitions.

Cash is what allows you to pay down debt, so you can restructure loans, improve cash-flow and move toward profitability.

So, are they paying down loans and restructuring them?

Because if they are, that's a good thing. But if they're simply paying down loans without restructuring or refinancing, that's indicative of a cash-flow problem.

If not cash, then what Capital? Assets like real estate? You keep real estate so long as you're getting a positive cash-flow from it. If you're sitting on property with no cash-flow or a negative cash-flow, then hell unload it. You don't need it. Maybe someone else can do something with it.

[foodyum]

Are they a target or looking to be bought out? Do they have propriety stuff or client list or real estate holdings that may be worth something to a competitor or investor?

[artillery77]

Originally Posted by njbiodude

I work at a publicly traded company where I can get stock options pretty soon.

I consequently bothered to read my employers quarterly statements and was surprised to see they had a pretty substantial net loss every quarter going back years. Interestingly, their stock has skyrocketed in the last year as our revenue has increased. Of course we're still losing millions a quarter.

It seems that looking at other similar companies in my industry that this is fairly common. The Bay Area is certainly full of unprofitable startups (Uber, Tesla etc).

I'm surprised investors tolerate net losses so well but it seems like all this "economic" growth is built on a facade of easy money.

Maybe I should just cash out those options as soon as they're available? It seems strange to hold a stock that's hemorrhaging capital.

Most cash out as it becomes available. It's why the recessions hit so hard here. When the easy money dries up, there's a ton of companies with limited runway left that are going to close...and for awhile, there's no market left for the California's most amazing product.....selling slick idea money hemorrhaging companies.

[Rowan123]

Originally Posted by Mircea

I rarely give investment advice, but in your case, I will.
You should be reading the company's prospectus or business plan. That should state clearly how long the company needs to operate before it turns a profit, and that could be 1 year or 10 years. Most companies are profitable in 5-7 years, but it depends on the nature of their business.

10-Qs will have much more recent and detailed information than a prospectus does. Most prospectuses incorporate the information in quarterly and annual (10-K) filings by reference anyway.

You probably have access to documents the general public doesn't have, and you should be reading those, too, if you can.

Not necessarily. If the documents he does have access to contain material nonpublic information then he couldn't trade in the company's stock anyway because that would be insider trading. A cashless exercise of an option would be considered trading in the company stock.

You need to direct those questions at management, because it might be a personnel issue. Not all presidents and CEOs are what they appear to be, and s/he might need to step aside and bring in someone else who knows what they're doing. It could be a lackluster sales force.

The only answers that management will provide will be information that is already in the public domain. They're not going to share meaningful information with an employee on a one-off basis.

If OP wants more information he can probably listen to the investor conference call that is held shortly after results are released. The information is usually on the Investor Relations portion of the website.

[leastprime]

I tried to suggest to DS to use the options as a cash management, long and short term tax tool. He didnt, probably out a couple hundred $K. 2016-2019.