The stock market offers no guarantees but here’s a near-certainty: investing in expensive stocks that trade for 100 times revenue will lead to disaster.

I’ve warned against 81 of them since 2000. In the next year, 73% of those surveyed lost money and 85% underperformed the Standard & Poor’s 500 Total Return Index.

Most equities have historically sold for about 1.5 times revenue. The average multiple today is around 2.5.

Tesla (TSLA), a well-known costly stock, trades at 8.9 times revenue.

Microsoft, one of history’s most successful firms, is valued at 9.5 times its revenue.

If a stock is worth 100 times its revenues, investors are overjoyed with its prospects. These are hope stocks, hype stocks, and, in many cases, meme stocks (stocks popular with Internet “Apes”).

Biotech Enhancers

There are now 28 stocks with a market capitalization of $1 billion or more that trade for 100 times earnings or more.

Twenty-seven of them are in the healthcare industry, with the majority of them being biotechs.

Why is it not a mystery? In their early years, biotech companies often generate little or no money while they invest resources in researching a solution for one or more diseases.

The study is interesting, and the potential payout is substantial.

The ultimate success would be a cancer cure. Someone will eventually discover one. Yet, the chances of it being the company you invested in are slim.

Cars were new and auto stocks were hot a century ago. The majority of them perished. Radio stocks experienced the same fate.

Picking the final victors from today’s generation of budding biotech startups is also a difficult task.

Virgin Galactic

The spaceflight firm founded by British entrepreneur Sir Richard Branson, Virgin Galactic Holdings (SPCE), sells for 999 times earnings.

It wishes to develop space tourism, and a ticket on a future flight costs $450,000.

Branson, famously launched into space in 2021.

This year, the business wants to have some paying guests in space. It made $1.6 million in revenue during the last four quarters.

The market value of the stock is $1.75 billion.

Assume that in eight years, Virgin Galactic will have a weekly journey into space with 100 passengers, each paying $450,000 for their ticket. This equates to $2.3 billion in annual revenue.

Perhaps you believe those assumptions are conservative. They appear to be generous, in my opinion.

Is the company then profitable? I doubt it, given the costs of rockets, rocket fuel, pilots, and insurance that Virgin Galactic will incur, making SPCE an expensive stock.

Karuna Therapeutics

Karuna Therapeutics (KRTX) is the largest firm in terms of market capitalization ($6.8 billion) that trades at 100 times earnings or higher.

The company, based in Boston, has developed a drug (KarXT) to treat schizophrenia and psychosis associated with Alzheimer’s disease.

KarXT is now in late-stage clinical studies. The company will most likely apply for FDA approval soon, with the goal of launching the medicine in 2024.

According to its website, Karuna’s mission is to “develop and provide revolutionary medications for patients living with psychiatric and neurological diseases.”

Reata Pharmaceuticals

Reata Pharmaceuticals (RETA) has debt that is 31 times the amount of stockholders’ equity (corporate net worth), making this an expensive stock.

The company, situated in Plano, Texas (the center of oil country), is developing anti-inflammatory and antioxidant medications.

Antioxidants come in a variety of natural and synthetic forms. They are thought to have promise in cancer therapy, because they shield cells from harm caused by unstable chemicals known as free radicals.

Except for 2014, when it made around $690,000, Reata lost money every year.

Losses have been increasing and totaled $311 million over the last four quarters.

Previous Performance

Today’s warning list of expensive stocks trading at 100 times revenue or above is the 19th I’ve prepared since 2000.

Prior lists showed a 12-month decline of 28.0% on average.

The Standard & Poor’s 500 Total Return Index gained 9.8% on average during the same time period.

Thirteen of the prior lists had a loss, while five had a profit. (When it comes to warning lists, profit is a negative thing.) Fifteen of the 18 lists underperformed the S&P 500.

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