Investing in emerging companies is always a roll of the dice, certainly when compared with buying shares in an established giant. It’s especially so now, I think, because there are still tons of zombie companies that went public during the heady days of pandemic-time speculation still floating around and cluttering up the small cap valuation landscape. They make it much harder to get a read on what the appropriate price in today’s market of a new high-risk venture might be.
For me, the most important questions to answer are:
–how strong is the need for the new company’s product or service?
–are there competitors and if so, how many and how large? what is my company’s competitive advantage?
–how big is the potential market?
–is the company profitable now?
–how am I going to monitor the company’s progress? in particular, are there any early warning indicators I can use to predict its future earning power?
–how long do my spreadsheets say it will take for the stock at today’s price to be at a reasonable PE multiple (say, 20x eps). Is it a year? three years?
–will the company need more funding to grow to the size I’m guessing it can attain in the next year or two or three?
–what new information would cause me to sell?
–if this doesn’t work out, what would cause me to cut my losses?
examples of possible leading indicators
–there’s an inverse correlation between interest rates and housing starts
–housing starts lead carpet and furniture purchases
–many years ago, when Intel made its prescient move away from memory chips to microprocessors, its chips were so hot they had to be put in ceramic casings to prevent motherboard meltdowns. Kyocera was the sole supplier of these casings …and its results led INTC’s by about a quarter
–fewer years ago, but still a lot, Apple launched its iPod music player, which was an epic seller for years (and most likely, I think, saved AAPL from Chapter 11). Same general story as INTC. The heart of the iPod was a small form factor hard disk drive. Only two manufacturers of these in the world. But both used the Japanese manufacturer that was the sole source for the spindles around which the disks spun inside the hdds. Again the information on spindle orders was publicly available.