You don't have credit card details available. You will be redirected to update payment method page. Click OK to continue.
I want to better understand what the drivers are that move a stock price up or down Specifically I am confused by the performance of growth stocks which have nil revenue generation, do not pay any dividend and/or have a business model that are based on the future commercialisation of a set of products currently under development. These companies appear to be speculative and the market seems to pump these stocks up and then take profits. A typical example might be PRL which is up 6.9% today (26/3). Why would someone or an institutional investor buy this stock
Seems like a lottery to me and keeps driving me back to value based trading (less risky, generally) but as Im 70 years old, Im wanting to have some fun in the market and growth stocks may provide this outlet.
A: Most growth stocks are priced on a multiple that relates to sales (revenue). The higher the growth rate in sales, typically the higher the multiple. The underlying assumption is that they will become profitable, and due to economies of scale and other efficiencies, they improve their net return as they take on extra sales.
Profitability is not always the best measure. A company can choose to be profitable by choosing not to invest in the business. A company can choose to invest all the money it makes and more in the business, and through depreciation or expensing the investment, is unprofitable.
Typically, growth companies are investing heavily in growing revenue and so are unprofitable, At some point in time, they will scale back on their investment (or hold it flat as sales increase), and then become profitable.
Recall some of the tech leaders such as Facebook, Amazon, or Google – which weren’t profitable, but are now highly profitable as their business matures.
