As a traditional investor, one of the ways I look to value a stock is based on the share price relative to current earnings. However, some well-known tech stocks have billions in revenue each year, but don’t make a profit. So should I still consider investing my money in these companies based on future potential, or steer clear?
Notable tech stocks to think about
In a new report published by Approve.com, some of the largest tech stocks that aren’t currently profitable are highlighted. For example, Airbnb has revenues of $5.3bn and was formed back in 2008, but still hasn’t reached the level to turn a profit.
Other well known names including Deliveroo and Peloton also enjoy revenues in the billions, but aren’t profitable at the moment. Both of these were formed in 2012-2013, so are almost a decade old at this point.
The concern stems from the fact that just because these companies rely heavily on tech, it doesn’t mean that profitability should necessarily be hampered. The report notes that Apple turned a profit after two years. Other examples include Alphabet (Google) turning a profit after three years and Meta (Facebook) after five. So I can’t simply excuse all other cases as being standard practice for the tech sector.
Should I buy loss-making stocks?
However, I shouldn’t discount the whole tech sector as a result. Tech stocks are such a broad group that even within my examples there’s a huge divergence.
For example, I currently own shares in Deliveroo. The tech side of the business (via the app) works well. Yet the difficulty has come from heightened competition in the food delivery space in the past year or so. The change in consumer activity post-pandemic is also impacting the broader business. From this angle, I’m still happy to hold my shares, and would consider buying if I didn’t already own the stock. This is because the losses are from factors that I think the business can cope with in the long term.
However, I wouldn’t buy shares in Peloton. The business is loss-making and I think this will continue because the company has fundamental long-term issues. This was highlighted in the past few quarterly results, with a huge restructuring initiative put in place to try and cut costs and improve margins. This is needed to help offset the stalling number of connected fitness workouts (and stalling revenue).
So the main difference in my mind when it comes to large tech stocks that are losing money is whether the business model is viable in the years to come. If it is, then I don’t mind too much that the revenues aren’t filtering down to profits right now. I have confidence that this can happen in the future. That’s why I like Deliveroo, but wouldn’t buy Peloton shares now.