It’s puzzling for sure when you see some companies that have been consistently non-profitable appreciate in terms of their share price over time. More interestingly, this is not a short phenomenon like a pump and dump event but rather a trend that lasts for years. The simple explanation is that these companies are usually tech companies and they have a high potential for growth in revenue. However, even with consistent growth in revenue, those companies are still loss-making because they have to burn cash to gain market share and retain consumers. Perhaps, their strategy is to burn enough cash to drive competitors out of business or to simply replenish their cash pile with cheap money or new investors. The point that I cannot really wrap my head around is how can they eventually become profitable, hence I would like to use this post to share more about one notable company that has been on a continued uptrend despite being non-profitable.
Sea Ltd NYSE:SE
Investors are looking for HIGH growth (share price appreciation not profit)
The interest in stable and profitable companies is no longer as ‘sexy’ as they were to previous generations. Namely, because the younger generation is feeling price pressures in terms of rising costs if they would like to live a comfortable and better-than-average lifestyle. This is also known as a less grounded approach according to investors from previous generations who were more focused on sustainable yields and dividend investing. In short, if the investment is not going to give high enough returns, it is not worth the capital of many (young) investors in the world. Not to mention the growing pool of options traders and gamblers in the market that drives share prices up and down without a serious stance.
They might become profitable over time?
Of course, there must be some form of light at the end of the tunnel but that is not the case for all tech companies. When the cash eventually runs out and investors are no longer looking to buy a stake in a company that has shown no potential for further growth or future profitability, we should see some of these companies running out of cash despite cutting down on their expenses and liquidating their assets. On the other hand, these companies might have some master plan that would eventually lead to profitability and earn returns for all investors who have stuck with them. For example, companies in China like Alibaba and Tencent have proven to be vastly profitable due to their influence and ability to spur advertisements and sales all around China.
Closing thoughts
My intent is not to disparage other investors’ beliefs in certain companies that are not yet profitable but rather to pose a question on this peculiar matter where many are actually willing to invest in a company that has been consistently unprofitable. This is even more interesting when the share price of those companies grows almost exponentially. In time, we will start to see reactions or those reactions might have already occurred even for companies like Sea Ltd (recently share price falling 40% from its peak). Looking at the chart below, I wonder what has led to the change of heart in investors despite being strong believers of a company like Sea Ltd. Only time will tell…
