No profit? No problem. Investors keep snapping up loss-making companies

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No profit? No problem. Investors keep snapping up loss-making companies

Profits are crucial to the growth of any company, but some of the biggest names in business today have yet to make money.

Publicly-listed companies like electric carmaker Tesla and music streaming firm Spotify make billions in losses.

Likewise, ride-hailing firm Uberlost $4.5 billion last year, but is gearing up for a highly anticipated public listing that will likely take place next year.

Investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.

That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.

The rapid growth of the tech sector is one reason why investors are willing to put their money into unprofitable companies, since many shareholders value growth and tend to be more comfortable even if firms aren't making huge margins.

Ritter's data showed that of the companies that went public last year, just 17 percent of tech companies were profitable compared with 43 percent of non-tech companies.

Jeff Bezos, Amazon
Lindsey Wasson | Reuters
Jeff Bezos, Amazon

The rise of tech titan Amazon shows just that: Investors are keen on a new business model.

Despite being light on profits, Amazon is the world's second most valuable company by market cap. That has made its founder Jeff Bezos the richest man in modern history, with a net worth of more than $150 billion.

Investors love Amazon's stocks, but the company's total profit for the past two decades pales in comparison to other highly valued companies in the U.S.

According to Thomson Reuters data, Amazon's profits for the last 20 years total less than $8 billion while Apple recorded profits of about $327 billion during the same period, and Facebook made $37 billion in the last decade.

In fact, the market's euphoria for so-called "growth companies" made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.

In an investor note last year, Einhorn cited his bets against Tesla and Amazon, and wrote that the market is "very challenging for value investing strategies, as growth stocks have continued to outperform value stocks."

"What if equity value has nothing to do with current or future profits and instead is derived from a company's ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?"

But there are also some signs there is a push back on the relentless hunt for growth over profit.

Chinese bike-sharing company Ofo, which is funded to the tune of $1 billion, announced it was scaling back or pulling out of countries like Australia and India to focus on profitability.

Meanwhile, a venture capital program known as Indie.vc — owned by VC firm O'Reilly AlphaTech Ventures — is focused on profitability when deciding which companies to invest in. Indie.vc says it looks at startups that "bleed black" — a reference to firms that make profits.

This is unlike many venture capital firms which typically put emphasis on growth and rely on a few lucrative exits.

"Real businesses make products and sell them for a profit. They focus on customers, revenue and profitability not investors, valuations and the next fundable milestone," it wrote on its website. "We believe real businesses make really great investments."