When it comes to taking risk, some investors just look for those “go big or go home” names. Why? It’s all about their level of risk tolerance - for better or worse. These investors will roll the dice, even if they often don’t admit it. Instead, they tell themselves that they like to focus on a few key companies that have massive “disruptive” potential for their market – or for society overall.
The two risk-taking sectors are technology and biotechnology. All the firms we’ll focus on have four things in common: substantial Internet traction, extreme volatility, a currently (or potentially) large short interest, and the ability to operate raw revenue platforms with varying degrees of success. With the renewed hype around technology and the Internet, here are three names that have the greatest potential to make or break investors.
If you live in the U.S., you probably use its service, as it now has more than 100 million users and a 3.6 percent share of all radio listeners. The big issue though is that most people don’t actually pay for Pandora’s premium service. Worse, the firm actually loses more money from paying subscribers than with free subscribers because of music-licensing agreements. Why would anyone touch this company with a 10-foot pole? The firm has substantial traction with users (remember, it has 100 million of them) and plenty of room to grow in the radio market.
At this point, investors are buying in the belief that the firm could develop a lucrative revenue model that leads to profitability. Let’s hope so, because one thing is absolutely clear: short sellers want to tear this name apart.
Even if you’re not even remotely tech savvy, you probably have a LinkedIn account for basic networking (or have at least heard of the site/service). While this firm is best known for its professional networking platform, it is also hell-bent on expanding into new areas such as aggregated news and bolting-on revenue streams. With the economy struggling to regain traction after a horrible recession, LinkedIn has thrived and hit 70 million users. The firm is one of the few Internet names that is actually profitable and operates what appears to be a sustainable model. Still, that doesn’t mean you won’t pay an arm and a leg to get in as the chart illustrates:
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While LinkedIn continues to improve the profitability of its professional networking platform and test new ideas for monetization, some investors aren’t so optimistic: The firm has already garnered a 5 percent short interest as of 07/29/2011.
Want to buy a first or second home? How about refinancing a mortgage? If so, Zillow.com is a great resource. But the reality is that banks are non-accommodative unless you have a lot of cash or they really like you (unlikely). Zillow is the go-to website for all things real estate. The only problem is that the U.S. real estate market – the company’s sole focus - is still in the can. Check out the premium investors pay today to get on the Internet bandwagon again:
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At this point, Zillow is profitable, but the CEO has stated the firm may be unable to maintain profitability if revenue growth slows. The launch of Mortgage Marketplace was a turning point for the firm that led to profitability. In one form or another, investors are taking on exposure to the real estate market. If it unexpectedly improves, Zillow will likely fly higher.
All these firms have tons of potential, with each one holding mind blowing quarterly (Year-Over-Year) revenue growth. At the same time, they are the types of businesses that will either make or break an investor. In our view, there’s no middle ground, since profitability will either dramatically improve or it won’t and the firms will bleed out over time. The only question: on which side of the tracks do you stand?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.