In the fast-paced world of business, where profits are often hailed as the ultimate measure of success, a curious phenomenon persists: companies worth billions of dollars that have never turned a profit. The recent initial public offering (IPO) of Reddit, the popular social media platform, has once again brought this paradox into the spotlight. The social media giant achieved a $9 billion valuation yet it has never returned a profit in 19 years of operation. But Reddit is not alone; it joins a league of high-profile companies that defy conventional wisdom by thriving despite their lack of profitability. Airbnb, Deliveroo, Peloton and Snap are collectively worth nearly $100 billion but none of them have ever posted annual profits. Ride hailing giant Uber, worth $166 billion, only posted its first annual profit in 2023, 14 years after inception. In this article, we delve into the enigma of profitless giants, exploring their strategies, risks, and the allure that keeps investors hooked.

The Reddit IPO and Beyond

Reddit, the virtual bulletin board where communities gather to discuss everything from memes to serious global issues, made headlines when it went public in March 2024. Yet, beneath the excitement lies a stark reality: Reddit has never posted a profit. Its valuation soared to dizzying heights during the IPO, reaching approximately $9 billion. But how can a company with no earnings command such a staggering price tag?  

The secret lies in user engagement. Reddit boasts over 430 million monthly active users, spending countless hours scrolling through subreddits, upvoting, downvoting, and passionately debating topics. Advertisers recognize this captive audience and are willing to pay a premium to reach them. Reddit’s advertising revenue, combined with its potential for future monetization, justifies its astronomical valuation. Now with the advent of AI, developers are paying millions for access to social media data to train their AI bots. Google reportedly paid $60 million to Reddit for access to its data to train its AI systems. Reddit’s trove of user data is highly valuable to advertisers and developers alike and this represents a highly lucrative income stream. This untapped potential is what gives investors confidence in the company’s growth.  

The Amazon Paradigm

Amazon is a prime example of a success story where unprofitable businesses become profit making machines. In its early days, Amazon operated at a loss, reinvesting every dollar back into growth. Sceptics questioned its viability, but founder Jeff Bezos had a grand vision. He understood that capturing market share and customer loyalty were paramount. Amazon relentlessly expanded its product offerings, improved logistics, and introduced innovations like Amazon Prime. The result? A company that now dominates e-commerce, cloud services, and entertainment, with a market cap exceeding $1.8 trillion and gross annual profit of $270 billion for 2023.

The Growth-at-All-Costs Model

Companies like Reddit and Amazon embrace what economists call the “growth-at-all-costs” model. They prioritise expansion, user acquisition, and market dominance over short-term profits. By doing so, they create moats—competitive advantages that protect them from rivals. These moats include network effects (where more users attract more users), data accumulation, and brand loyalty. Investors buy into the promise of future profitability, betting that these companies will eventually monetize their massive user bases. That being said, investors don’t even need these companies to ever become profitable in order to make a return on their investments. They merely need share prices in the company to rise. If the company keeps growing and generating hype, share prices invariably rise and investors can sell with healthy returns. Fundamentally, this continued growth keeps investors ploughing money into these companies, ensuring that they stay afloat despite their losses. 

Valuation Metrics Beyond Profits

Traditional valuation metrics like price-to-earnings (P/E) ratios lose relevance when dealing with profitless companies. Instead, investors focus on alternative measures:

  1. User Metrics: Active users, engagement levels, and retention rates matter more than net income. Companies with loyal, growing user bases are deemed valuable.
  2. Market Share: Dominating a sector—even without profits—can lead to immense valuation. Think of ride-hailing services like Uber or streaming platforms like Netflix.
  3. Total Addressable Market (TAM): If a company operates in a vast market like social media, investors believe it can eventually monetize its user base.

The Sustainability Question

Critics argue that the growth-at-all-costs model is unsustainable. They point to the dot-com bubble of the late 1990s, where many profitless companies collapsed. Some worry that today’s unprofitable “unicorns” (startups valued at over $1 billion) face a similar fate. The risk lies in overextension, excessive spending, and reliance on investor capital. If the promised profitability doesn’t materialise, disillusionment sets in, investors stop investing and the house of cards tumbles. Evidently, unprofitable businesses are at a much higher risk of collapse than profitable ones. The model however, is not inherently unsustainable. Startups of any size often struggle to make profits at their outset but can become profitable when they cement their market position. These startups initially rely on investor confidence in their vision and potential for success to stay afloat. This reliance on investor confidence however, applies to most businesses, even profitable ones. Profitable companies can also collapse if investors and consumers lose confidence in the vision of the company over a sustained period. Therefore, the model is not necessarily unsustainable, its just a higher risk model as the unprofitable companies are significantly more dependent on investor confidence and fresh investments. 

Conclusion

Profitless giants defy conventional wisdom, but they also redefine it. Their audacity to prioritise growth over profits challenges our understanding of business fundamentals. Some of the most dominant enterprises across different sectors have never been profitable and may never be. Giants like Airbnb, Lyt and Peloton are formidable in their fields but consistently post losses. We must tread carefully, recognizing that while these companies may soar to new heights, they also teeter on the edge of uncertainty. The paradox remains: billions in valuation, zero in profits—a testament to the power of vision, user engagement, and the allure of the unknown.