With billons in revenue but no profit, should I buy these tech stocks?

Jon Smith considers some of the tech stocks at the moment that are losing money despite posting large revenues, to see if they’re worth buying now.

Woman using laptop and working from home

Image source: Getty Images

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.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

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.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jon Smith owns shares in Deliveroo. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Airbnb, Inc., Alphabet (A shares), Alphabet (C shares), Apple, Deliveroo Holdings Plc, and Peloton Interactive. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

More on Investing Articles

Two hands holding champagne glasses toasting each other with Paris in the background
Investing Articles

Can the stock market make me rich even now?

Here are three ways I'm coping with the stock market's recent bout of weakness and aiming to build wealth in…

Read more »

Cogs turning against each other
Investing Articles

3 top investment trusts to buy right now

Investment trusts offer a wide range of options for investors. And in troubled times, they provide some safety through diversification…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Why hasn’t the FTSE 100 crashed in 2022?

The catastrophic events of 2022 have left investors around the globe fearing the worst for stock markets. And some have…

Read more »

Trader on video call from his home office
Investing Articles

2 inflation-resistant FTSE 100 stocks to buy today

Soaring inflation could dent my returns if I don't take care. Here are two top inflation-resistant FTSE 100 stocks I'd…

Read more »

Tabletop model of a bear sat on desk in front of monitors showing stock charts
Investing Articles

Why a bear market is an investor’s best friend

A bear market can certainly be scary. But any investor tempted to sell might benefit by looking at Warren Buffett's…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Rolls-Royce share price could be stuck below £1 for a while. Should I buy?

The Rolls-Royce share price has been trading at penny stock levels since April. Could the stock be a bargain at…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m aiming to make £45,000 in passive income with UK shares and never work again!

Investing regularly in UK shares can generate a substantial passive income over the long run. Zaven Boyrazian demonstrates how.

Read more »

Portrait of construction engineers working on building site together
Investing Articles

Down 30%, are CRH shares a screaming buy?

The CRH share price has slumped this year. Roland Head asks if this overlooked FTSE 100 share could be a…

Read more »