Spotify and Tesla show growth is still winning over profit – Financial Times

Despite seeing losses more than double to €1.2bn last year, Spotify has been rewarded with a stock market value of more than $25bn © Bloomberg

The last time the stock market showed this much enthusiasm for a handful of tech companies addicted to profitless growth, it was the height of the dotcom boom.

In the first quarter of this year, chronic money-loser Netflix contributed 7.5 per cent to the overall upside in the S&P 500 index all by itself. That was exceeded only by Amazon, which was long a by-word for expansion without earnings: the company underwrote 18.8 per cent of the broader market’s gains.

The parallels run only so far. The valuation underpinnings of the tech sector overall are far stronger than they were at the end of the 1990s, thanks to the emergence of a handful of hugely profitable giants.

But after the shockwaves that have passed through the stock market since the middle of March, it is as well to listen for the echoes from the late 1990s. Some tech stocks have taken a serious dent. Are the days of tying valuations to the promise of unspecified future profits over?

Not if this week’s Wall Street debut of Spotify is anything to go by. The music-streaming service faces a tough road to profitability. It is heavily dependent on buying content from three music labels, which have little incentive to let it take a bigger slice of their pie. But despite seeing its losses more than double to €1.2bn last year, it has been rewarded with a stock market value of more than $25bn.

Any company that has built its financial strategy on an expectation of constantly tapping investors for more cash is bound to look less secure

At least Spotify did not come to Wall Street in desperate need of cash, instead arriving through the back door of a direct listing that did not involve selling any shares. That makes it look downright conservative compared with the prominent standard-bearers for profitless growth during the latest tech-led bull market: Netflix and Tesla.

The online video streaming company has been haemorrhaging cash, to the tune of $4.6bn over the past three years, using debt to fill the hole. Electric-car company Tesla, for its part, has bled $7bn over the same period, selling $7.2bn worth of stock, convertibles and straight debt to make up for the shortfall.

With market uncertainty rising, any company that has built its financial strategy on an expectation of constantly tapping investors for more cash is bound to look less secure.

No surprise, then, that Tesla has been trying to get Wall Street to shift its gaze away from its present struggles and on to the sunny uplands it sees ahead in the second half of the year. According to the company, that will be when it achieves high production volumes, good gross margins and strong positive cash flow. It calls this a “long-sought ideal combination”. Nirvana cannot be far behind.

Businesses like this are inherently vulnerable when markets turn. The margin for error is small and any weakness in execution can lead quickly to a loss of confidence — a condition Tesla is coming to understand.

But even after the massive volatility that has returned to tech stocks, it looks far too early to call an end to the run. Despite slumping 20 per cent in little more than a month, Tesla is still worth just 10 per cent less than the far bigger — and solidly profitable — General Motors.

When the dotcom boom turned to bust, Amazon faced the same bankruptcy speculation that swirls round the electric-car maker now. Nearly two decades on, it still has little regard for bottom-line earnings. Its ecommerce and logistics businesses barely break even in a good year (though cloud computing now provides at least a modicum of profits).

If the market was going to have second thoughts about Amazon’s profit-lite strategy, now would be the time. In the face of a direct attack from President Donald Trump, political risk has risen sharply — producing just the kind of uncertainty markets hate. The remarkable thing about Amazon’s shares, however, is how well they have held up.

True, they have fallen slightly more than other so-called Faang stocks, such as Google and Apple, which have a much stronger profit underpinnings. But they moved in virtual lock-step with Netflix and Tesla in the days when the tirade from the White House was at its fiercest (at least, until good news about Tesla’s first-quarter production sent the electric-car maker’s shares up 14 per cent in the space of two days).

It may well turn out that the stock market has reached a turning point. But for now it is still too early to count out the tech world’s high-growth money losers.

richard.waters@ft.com

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