Investing in low profit new-age stocks? Zerodha's Nithin Kamath shares some tips

view original post

Investing in new-age businesses — especially with tech startups tapping the public markets with unprecedented valuations — is the hottest thing right now in markets, with retail investors leading the way.

However, most of the new-age businesses, except for one or two aren’t profitable yet and analysts flag high risks while investing in these companies.

Zerodha boss Nithin Kamath probably decoded this for the young investors who are charmed at emerging tech companies and would like to invest in these firms, considering the rush of such companies listing on Indian exchanges.

In a tweet, Nithin Kamath said the only right questions to ask, while investing in new-age businesses that aren’t profitable yet and carry large risks, are:

“Can the target market expand? Can they continue growing? Is the user growth real?”

Kamath, who is known for his educational tweets on social media, further went on to share a blog that evaluates investing in new-age high growth and low-profit businesses on the Indian exchanges.

“Investing just based on historical financial data or information that is available to all has mostly become redundant, especially more when evaluating new-age tech-first businesses,” Kamath said in a post.

According to Kamath, the most important thing to do is to factor in risks by allocating only a portion of one’s portfolio to such high growth and high risk stocks. The more conservative one is in terms of risk, the higher the odds that he or she will stay invested even if there are large drawdowns.

One of the questions key to ask before investing in a new-age tech business is “can the target market expand?,” said Kamath, adding that how much larger can that target market that the business is catering to get.

“This is the wildcard. For any business that is in a category that is expanding fast means tailwinds in that segment will automatically help them significantly. If you look at private market investors (VCs and PEs), their primary bets are on sectors and industries that have the potential to expand manifold,” Kamath further explained.

Subscribe to Mint Newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!