Why do some hype stocks become permanent market darlings while others flame out spectacularly?

The rise of social media platforms gave birth to at least four successful publicly traded stocks with significant growth in market capitalizations since IPO:

• Meta (the artist formerly known as Facebook): $100 Billion to $480 Billion
• Pinterest: $10 Billion to $19 Billion
• Twitter: $14 Billion to $44 Billion (acquired)
• LinkedIn: $5 Billion to $26 Billion (acquired)

Yet cannabis stocks, which went through a hype cycle in 2018, have been absolutely demolished in the past few years:

How do we distinguish one from the other so we can buy the winners and avoid the disasters?

In my experience, the two most important factors for hype stock success are 1) timing and 2) business quality (i.e. profitability / competitive moat).

Most new technologies get overhyped before they are ready for true mass adoption…

Virtual reality flopped in the ‘90s (remember the Nintendo Virtual Boy?). Wearables like Google Glass failed to go mainstream. Even e-commerce needed a decade after the internet was born to take market share from shopping malls.

Timing matters. New technologies can’t just be cool, they have to be practical enough and inexpensive enough to gain wallet share from consumers & businesses.

The news media loves to tout scientific breakthroughs in futuristic fields. Recently we’ve been promised that progress in quantum computing and nuclear fusion are on the cusp of changing humanity.

The reality is that these technologies are still in the lab and won’t have a major societal impact for many years (if ever).

Check out the stock performance of quantum computing companies which went public during the SPAC craze of 2021:

Clearly you don’t want to be too early in jumping on the trend.

But you also don’t want to be too late!

Public stock market investors can only benefit from new technologies when there are “pure-play” tradable public companies which still have room to grow.

Sometimes it takes awhile for dominant companies in hot areas to come public because venture capital firms fund them and “privatize” the returns.

That’s what happened with Uber, which came public at a $75 Billion valuation ten years after being founded. Four years later, the stock still trades below that valuation.

I think current “AI” hype stocks are in danger of flaming out because the leading companies like OpenAI are not yet public and could stay private for many more years (sorry Sandra!).

So timing is vitally important to earning good returns in hyped up stocks.

And so is business quality.

Cannabis stocks have floundered because too much competition has driven down profit margins despite the rapidly growing end market.

Remember daily deal websites? They exploded in number but most of them could not differentiate themselves and died out.

Even industry leader Groupon has seen a stock decline of 98% since IPO!

In contrast, Tesla stock did so well because it had the entire electric vehicle market to itself for a decade AND it went public at only a $2 Billion valuation.

So here’s the takeaway: after you identify a trend / hype cycle, the next step is to spend an hour researching and thinking about the trend.

Figure out if the technology is ready for production and if users are actually spending money on it.

Figure out who the leaders in the industry are, and if they are trading publicly. Are they profitable? At a minimum, is profitability improving or revenue growth accelerating?

The basic info can usually be found by Google searching, reading articles, and looking at income statements or investor relations presentations of relevant companies.

If you’re ever in doubt you can always ask me to weigh in!

It's always more fun hunting for the next great stock with friends 😎

Cheers,

Travis