15 ‘hot’ tech companies that are actually losing millions
NEW YORK – At the turn of the millennium, the “Dot Com Bubble” burst—an infamous example of popularity trumping profitability, noisy buzz beating good business.
Trendy start-ups like Pets.com raised hundreds of millions, produced a Super Bowl ad and went public, only to fold months later, with hundreds of layoffs and thousands of bitter investors. Enamored by the potential of new technology, everyone forgot about Business 101.
At least the industry has learned its lesson.
Or has it? FindTheCompany turned to the current tech landscape to see which companies might be reliving the late-’90s bubble. They wanted to find examples of hot, growing organizations that nonetheless remain extraordinarily unprofitable. Specifically, they started with companies that had at least:
- 50 percent revenue growth year over year (2014 vs. 2013)
- 20 percent headcount growth year over year (2014 vs. 2013)
They then sorted the list by 2014 profit, from lowest (i.e. most negative) to highest. The data comes from Zacks Investment Research.
The following 15 companies emerged as both the hottest (i.e. growing fast) and most unprofitable (tens, if not hundreds of millions, in losses):
Unsurprisingly, Twitter comes out on top. Once pegged as the successor to Facebook’s social media throne, Twitter has stalled where its rivals have grown, at least when it comes to profits. The service is still wildly popular—with over 300 million active monthly users—but its profits remain deep in the red. Unless the social media giant can get better at monetization, the business simply isn’t sustainable.
Outside of Tweet Land, they see a mix of security and enterprise software companies composing much of the top 10. ServiceNow (service management software) and Workday, Inc. (human capital management software) have each emphasized revenue and customer growth, assuring investors that massive expansion now means more profit later. The same is true for network security firms Palo Alto Networks and FireEye, Inc., where eye-popping revenue numbers have come hand-in-hand with net-negative profits. While none of these companies face Twitter-esque pressure from investors, some are beginning to feel the heat.
Going public might bring about more money, more support and more visibility, but it can also impede growth. “Once you’re public, Wall Street wants to see earnings,” said FireEye CEO David DeWalt in an interview with the Wall Street Journal. “If I had my way, I probably would continue to grow the company much faster than I would produce earnings.”
Fast growth can bring about structural changes as well, as spry start-ups become big (sometimes bloated) organizations. Take Zendesk Inc., the cloud-based customer service platform that exploded in 2010-11, then IPO’d in 2014. The thousand-employee firm rode a technological advantage to success, but now faces pressure from smaller, more agile competitors. While many analysts still see a bright future for Zendesk, the company is spending more than ever to acquire new customers, leading to millions in losses. Investors can only hope the big bet pays off.
They round out the list with three popular consumer brands: TrueCar, Zillow and Pandora. All three companies have assured investors that their losses are all about future growth, and each has invested in key assets like technology and strategic partnerships.
“We’re building a brand,” said TrueCar founder and CEO Scott Painter in a May 7 earnings call, where he stressed new marketing initiatives, including TRUECash, which allows dealers to offer special deals based on customers’ location, car preferences and auto needs. “It’s not a shopping experience, it’s a buying experience.”
Meanwhile, Zillow continues to reinvest capital in strategic acquisitions and partnerships, whether it’s signing up individual agents or making giant purchases, like its $2.5 billion acquisition of competitor Trulia. (While the deal finally closed in 2015, Zillow attributed $21.5 million of its 2014 losses to costs associated with the acquisition.)
Of the three brands, Pandora arguably has faced the most heat, a company with lots of competition from big-name competitors like Spotify and Apple Music. For now, Pandora remains on top of the industry, with better brand recognition, more users and more revenue than its rivals. But unlike cars and real estate, the music industry presents many looming problems: consumers want to pay less and less, while streaming services must pay more and more to maintain an acceptable catalog of tunes. Time will tell whether Pandora—or really, any of the streaming music players—will emerge as sustainable, profitable businesses.