While it may seem counterintuitive, many famous and successful companies have never earned a profit.

In other words, their stock price continues to go up, but they lose money one quarter after the next.

How can that be? Why would investors continue pouring their hard-earned cash into a losing company? 

It all boils down to hope. Hope for significant growth in the future that can outweigh all the quarters or years of losses. Hope that someday, all the investment, research, and development will pay off, and the company will turn into a profitable cash cow.

And the fact is, sometimes that's the case, like with Amazon. Did you know that it took Amazon 9 years after being founded and 7 years after going public before it turned a profit? But look at it now. Over the past 10 years, Amazon's stock price has gone up a staggering 612%, averaging around 22.42% per year. That means an investor who had put $100,000 into Amazon stock a decade ago would have roughly $780,000 today.

It's this potential for explosive growth that draws investors to unprofitable companies. However, it also comes with a great deal of risk. Just because a company has survived on losses until now doesn't mean it will continue to do so indefinitely. Companies must have enough cash reserves and enough of a track record demonstrating future profitability through new products and services if they want to continue enticing investors.

And as an investor, it's essential to match your investments to your risk tolerance, which is one of the most important reasons to consider hiring a trusted financial professional.

Understanding Stock Market Speculation.

Speculation is a term that is frequently thrown around in the stock market.

At its core, speculation refers to the act of making an educated guess about future market conditions and their potential impact on stock prices. While some may view speculation as a risky and uncertain practice, the truth is that it is an essential component of many investors' strategies. For example, venture capital firms are built on speculation — doing everything they can to pick the next Unicorn tech company out of a sea of prospects.

This is one of the reasons that firms without a profit can stay in favor — investors are speculating that someday, their investments will pay off in a big way. But, of course, this speculation comes with risk, and investors must be prepared to lose some or all of their investment should their speculation turn out to be incorrect.

Creating Value Despite Losses.

Despite not making money, a company can still hold significant value.

This can be achieved through various factors, such as a strong brand, market share, or the potential for future growth. A company's brand and reputation are valuable assets that can take years, even decades, to establish. Market share is also important as it reflects a company's position in an industry and can lead to future growth opportunities. Additionally, a company may have valuable intellectual property, such as patents or proprietary technology, that could be licensed or sold for a substantial profit. While profitability is important, it is not the only measure of a company's worth.

A valuable company is one with a strong foundation and potential for future success.

Consider the following list of famous companies that have all lost more than $3 billion since their founding, according to MarketWatch.

1. Uber. Founded in 2009. $31.7 billion in losses.
2. WeWork. Founded in 2010. $20.7 billion in losses.
3. Rivian. Founded in 2009. $11.1 billion in losses.
4. Snap. Founded in 2011. $9.1 billion in losses.
5. Lyft. Founded in 2012. $8.9 billion in losses.
6. Airbnb. Founded in 2008. $6.0 billion in losses.
7. Door Dash. Founded in 2013. $4.6 billion in losses.
8. RobinHood. Founded in 2013. $4.2 billion in losses.
9. Wayfair. Founded in 2002. $3.0 billion in losses.

Many of these companies have demonstrated the ability to stand out in their respective markets, and investors have rewarded them. But, it remains to be seen how many of these companies will be left standing a decade from now.

"Many investors deem the demand for a product, or what it could do in the future for society, a bigger determining factor than generating profits when it comes to its stock value," says Leonard Kim of AdvisorCheck. "Sometimes, you will find companies like the ones mentioned above trading at higher prices per share than their profitable competitors. Due to these types of discrepancies, working with a financial advisor is the best way to navigate the stock market." Leonard continued.

There Are Many Factors (Not Just Profitability) That Influence Stock Prices.

Investing in stocks can be daunting, especially when it feels like there are no clear indicators of what makes stock prices increase.

However, understanding the factors that drive up stock prices can be immensely helpful in making informed investment decisions. And while profitability is one factor that can influence stock prices, it can be outweighed by the following:

1. Company Performance: When a company reports strong revenue (not profit), investors feel more confident in its future prospects, leading to an increase in demand for the company's stock and a subsequent increase in its price.

2. Market Conditions: The overall state of the economy can have a significant impact on a company's stock price. Factors such as GDP growth, unemployment rates, and interest rates can affect investor perception of the company's value beyond just its current earnings.

3. News and Events: News and events, such as changes in management, product developments or recalls, or major lawsuits, can all impact investors' perception of the company's value and, therefore, its stock price.

4. Industry Trends: Investor sentiment can be influenced by broader industry trends. For example, a company operating within a rapidly growing industry might be expected to generate higher revenues and profits in the future, even if it is not currently profitable.

5. Competition: Market competition can significantly impact a company's stock price. If a competitor launches a new, superior product or manages to capture a larger market share, investors may perceive the company to be at risk.

6. Analyst Reports: Analyst reports can have a significant impact on a company's stock price. If a respected analyst issues a positive report on the company's future prospects, it can boost investor confidence and drive the stock price up.

7. Investor Sentiment: Investor sentiment can be influenced by factors such as rumors, market conditions, or simply a general sense of optimism or pessimism. This can cause stock prices to fluctuate even when there is no clear reason for the change.

By analyzing these and other factors, investors can gain a better understanding of what influences stock prices and make more informed investment decisions.

So Why Are Investors Willing To Take Risks With Unprofitable Companies?

Although investing in unprofitable companies may appear irrational, there are some key reasons investors do it.

One reason for this is the potential for significant returns down the line. Early investments in companies like Amazon and Tesla, which were unprofitable for years, paid off tremendously for those who were willing to take a chance on them. Additionally, some investors may see unprofitable companies as undervalued and potentially profitable in the future. Finally, there may be a belief that the company's management team will eventually figure out a way to turn the business around and become profitable. While investing in unprofitable companies is not without its risks, it can also offer the potential for high rewards.

As demonstrated, there are various reasons why unprofitable companies can have value, and the stock price can still rise. Speculation plays an important role in this process, as investors weigh the short-term risks versus the potentially large reward of future success. Many factors contribute to investor decision-making, including the potential for future earnings growth and investor sentiment. It's important for investors to carefully evaluate these considerations before taking a risk on any company that has yet to produce a profit. Ultimately, companies with compelling stories that resonate with investors have a distinct advantage and can reap the rewards when their stock rises.

But What Does This Mean For You As An Investor?

Ultimately, while some unprofitable companies may pay off big in the long run, the fact is that even professional investors will struggle to pick the diamond in the rough.

That's why it's essential to have a low-cost and globally diversified investment plan, allowing you to capture the market's total return, no matter which companies are successful. Of course, that doesn't mean you can't invest in a few speculative stocks, but generally, most financial advisors will recommend limiting that to 5-10% of your total investable assets. Enough to have some fun, but not enough to blow up your financial plan in the worst-case scenario.

Are you looking to invest but feeling overwhelmed by the choices? 

With AdvisorCheck, you can find your perfect financial advisor match quickly and easily! Our free platform offers certified professionals in various areas of finance, ensuring that you'll get the best advice possible. 

Sign up today and take the first step toward achieving your financial goals. With us, you can ensure your finances are in the right hands! So, what are you waiting for? Join AdvisorCheck now and start making wise investments today!

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Written by Anders Skagerberg, CFP

Fact checked by Billy Quirk

Reviewed by KJ Kim

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