Many technology stocks that recently listed on public US stock markets do not make a profit. Examples are Uber, Lyft, Snap Inc., the maker of the Snapchat application, are just some of numerous examples.
Will they survive without making profit? No, I do not think they will survive in the long-term if they do not break even, be it with a slight profit margin.
Yes, people will point to Amazon.com, Inc. They remained unprofitable for a long time. But eventually Amazon did break even and is earning a profit which covers its expenses and a large chunk remains and stays with the company.
The situation now resembles a lot the Dot Com Boom in 2000. Many technology companies back then went public without revenues even. And they all went bust like pets.com or whatever. Yes, the Dot Com Boom and subsequent bust gave us Alphabet Inc.(Google) and Amazon, but both companies are now profitable. Now, the newest technology companies are making huge revenues but they are notoriously unprofitable. Fitbit, Groupon, Zynga, GoPro are examples which market capitalization dove enormously due to not fulfilling both growth and profit expectations. Profit is good. Just look at Facebook, which has a high net profit margin and billions of USD in yearly profit.
No, I do not believe you can build a sustainable business without being profitable. An advantage of information technology companies is that they are scalable. If they grow revenue quickly enough, which is inherently possible due to their business model of one internet site for all users, and partially control costs they will become profitable. But no one knows how long the growth period will continue, so these companies should not invest too much in future growth without controlling costs. Otherwise, sooner or later their market capitalization will tend to 0(zero).
If they do not make profit, their investors will rely on the "greater fool theory". Or, basically finding a greater fool to whom to sell their shares with a nice profit. This is not sustainable for long term investors like pension funds, endowments and foundations or even mutual funds. If it continues like this, it will all end in tears. Yes, I know some people will get rich, but it will be a zero sum game, which will not advance society and is not OK in the long-term.
So as a person who values companies, I do put a hefty premium on companies which grow quickly, but also make a profit. Every reasonable pension fund, endowment, foundation, mutual fund or hedge fund manager does also.
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Petar
Vladimirov Posledovich is not liable for any investment losses incurred
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Respectfully yours,
Petar Posledovich
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