February 17, 2025 (Maple Hill Syndicate) There are no sure ways to win in the stock market. But here's a fairly sure way to lose: Invest in a stock that sells for 100 times revenue or more.
The price/sales ratio for General Motors (NYSE:GM) is less than one, for McDonald's Corp (NYSE:MCD). about 9, and for Microsoft (NASDAQ:MSFT) about 12. Even Tesla (NASDAQ:TSLA), which has a loyal and rabid following, goes for less than 13 times sales. When I'm looking for stocks to buy, I usually want to see a ratio of 2 or less.
Stocks that sport a price/sales multiple of 100 or more are hope stocks, dream stocks. And they are popular stocks, at least with speculators. That's why they sell for such an extravagant multiple.
Let me suggest a few of these stocks to avoid. They are red hot, and might burn you.
Strategy
Strategy Inc. (NASDAQ:MSTR) known until this month as MicroStrategy Inc. -- fetches 139 times revenue.
The company, based in Tysons Corner, Virginia, and run by Michael Saylor, sells business software but has posted a loss in four of the past five years. Its value comes from the trove of Bitcoin Saylor has accumulated -- and continues to accumulate.
That hoard consists of 478,740 bitcoins, making Strategy the largest single holder in the world. The current market value of its coins is around $47 billion.
But the market value of the stock is much greater than that, about $87 billion. So why do people buy Strategy stock instead of just buying the coins? There are several possible reasons they may, for example, think Saylor is a shrewd cryptocurrency market timer but I think it's folly.
IonQ Inc. (NYSE:IONQ), out of College Park, Maryland, sells access to the use of quantum computers and is also working on ways to improve such computers.
Josh Schneider, a writer for IBM (NYSE:IBM) Blog, says that quantum computing uses the unique qualities of quantum mechanics and will soon be able to solve complex problems that supercomputers can't solve, or can't solve fast enough.
IonQ's revenue for the past four quarters was about $37 million. The stock market values the company at more than $8 billion, for a price/sales ratio of 210.
Revolution Medicines
Based in Redwood City, California, Revolution Medicines Inc. (NASDAQ:RVMD) is working on a new type of cancer therapy. It involves inhibiting uncontrolled cell growth by altering certain genes known as RAS genes.
All 15 Wall Street analysts who follow the company recommend its stock, many of them strongly. I feel that the stock is highly speculative, since the price/sales ratio is more than 8,000. I wish the company luck, but I've seen many promising oncology stocks bite the dust in the past.
Trump Media
Trump Media & Technology Group Corp. (NASDAQ:DJT) is a nascent business run by President Donald Trump. I think many people buying the stock are expressing their political preferences through an investment lens.
Revenue in the past four quarters was less than $3 million. The company's market value is well over $6 billion. So, the price/sales ratio is more than 1,600. I think Trump can grow the company dramatically but I feel the stock is priced as if that had already happened.
AST SpaceMobile
AST SpaceMobile Inc. (NASDAQ:ASTS) went public in 2021 by merging with a special purpose acquisition company (SPAC). The stock was a dud until mid-2024, when the company signed an agreement to provide satellite service to AT&T's mobile phone network. In the past year, it's up more than 800%.
Analysts predict a huge increase in revenue this year and next, but they don't project profitability until perhaps 2027. Their average one-year price target ($34.20) is less than 7% above the current price. The price/sales ratio here for the moment is more than 1,800.
The Record
I've written 19 previous columns on stocks selling for 100 times revenue. In 15 cases, the stocks I warned about did worse than the Standard & Poor's 500 Total (EPA:TTEF) Return Index over the next 12 months. In 13 cases they sustained losses.
My warnings covered 84 stocks. Sixty of them declined, and 21 of them fell 50% or more within a year. The average one-year return for all 84 stocks was a loss of 22.2%, while the S&P gained 9.3% on average.
Bear in mind that my column results are hypothetical and shouldn't be confused with results I obtain for clients. Also, past performance doesn't predict the future.
Disclosure: In a hedge fund I run, I have a short position in Strategy Inc., betting on a decline.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.