[Earnings 101] Fundamental analysis: What drives stock price of unprofitable companies?

On Tuesday, @moo_Live broadcasted Alibaba's $Alibaba (BABA.US)$ 2021 fiscal third-quarter earnings call. This live was really full of highlights! The most prominent of these is the large investment in new retail business, gradually forming an economy around consumers. Nokia $Nokia Oyj (NOK.US)$ will release its earnings report at 8:00 am(EST)! Can Nokia make a turnaround in the 5G competition? How to analyze the stock based upon the fundamentals of the company? Why do some companies keep losing money but their stock still rises? This article will provide answer.

1. Market Size

In the field of emerging industries, demand is forming, and the future market capacity is difficult to estimate. This type of industry is often the cradle of great companies, with bull stocks emerging in an endless stream. It is necessary to focus on large companies in small industries. For industrial transformation, the old leading companies are being deconstructed, and new ceilings are not yet or are being formed in industries. "Innovation" will break the original industry balance and create new demands. Companies that represent new technologies and new strengths will stand out.

Once Nokia was the king in the mobile phone industry. Since 2010, the mobile phone business has gone downhill. Nokia summarized it as a systematic reason, and was gradually replaced by emerging brands. In the financial report released in the third quarter of 2020, the profit was lower than expected, and it fell by more than 17% before the market. Its new CEO announced that it lowered its full-year profit forecast and significantly adjusted the company's strategy. It is worth noting that Nokia has increased its investment in 5G. However, in the case of high-speed competition on the 5G track, Nokia seems to lack core competitiveness.

[Earnings 101] Fundamental analysis: What drives stock price of unprofitable companies?

For industries that have reached the ceiling. Investment opportunities come from low-cost companies with monopoly management capabilities to merge disadvantaged companies, expand market share, and reduce the marginal cost of operation and sales.

2. Competitiveness

Regarding the competitiveness of an enterprise, what we need to pay attention to is whether the main business of the enterprise is different from that of companies in the same industry? How strong is the momentum of the main business? And what are its market competition barriers?

In the previous teaching content, we have explained how to distinguish between the company's main business and the profitability of the main business through the cost and profit of the company.

According to Alibaba’s earnings report released on Tuesday, BABA’s acquisition of Sun Art Retail and the promotion of Single Day and other activities have made BABA’s main business new retail quarterly revenue almost doubled year-on-year. It is also worth paying attention to the Alibaba Cloud business, which is expected to achieve positive profit growth within two quarters.

3. Growth
Is the company's growth model internally driven or caused by external capital operations?

Internal driving includes exploring new products and new markets; tapping demand for old products and increasing market share; raising product prices; reducing various costs; capital operations include mergers and acquisitions, restructuring; asset injection.

Why do some companies keep losing money, but their stock still rises instead of falling? One is that stockholders may continue to buy. If the listed company reports that it has been merged and reorganized, the stock price will soar. The second is that major shareholders want to save themselves, and try to throw away their chips early and cash out at a high position. The most common situation is naturally that the growth of a company is favored by the market. Although it is in a state of loss, the loss is gradually reduced and it is expected to achieve profitability.

Comparing Nokia's earnings report in recent years, the loss has been reversed in 19 years. This afternoon, Nokia released a better-than-expected earnings report for the fourth quarter of 2020. Lundmark further explained that the increase in gross profit margin of 5G equipment mainly come from the reduction of product costs. Therefore, increasing production of the ReefShark chipset is also very helpful, but fiscal 2021 will be a challenging year, especially due to fierce competition that has led to a decline in North American prices and loss of market share.

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