Is profit important anymore?
This week Youtube reported 1 billion viewers which is an astonishing number! The organisation however, is yet to turn a profit – despite generating $4 billion in revenue.
I often consider if we are more focused on users and user growth of online companies than their ability to deliver a profit. It seems “users” are becoming the new form of global currency?
This high level of focus on “users” seems to be influencing the investor community too. Analysts appear today to be more focused on the number of users and the growth of the users than if the company is turing a profit.
The founding entrepreneurs are often more focused on growing the user base than the pressures of making money.
When asked about how they intend to make money, the common response is “once this user base reaches a critical size, we will then work out how to make money from this group of people”.
The reality with each of these business models however, is that they will be highly reliant on advertising spending to fund this next chapter of their business cycle. The question has to be raised then…. have analysts missed the missing link?
Advertising spending last year globally increased by only 2.6% and is forecasted to grow 5.7% into 2018. So is this a high performance engine of growth worthy of demanding high valuations?
If the end game for these companies is to sell advertising, are they moving into a “high growing” segment? It appears not.
It seems that a lot of these companies are playing the short game of simply transferring market share from the traditional mediums of paper, TV, magazines, flyers etc, to the new mediums of apps and online content offerings. Once this transition is completed, i wonder what will happen then to the future user base growth? Will it revert back to the headline numbers of just 2-5% p.a. growth?
Like most investment ideas, it is very easy to be caught up in the hype and excitement of innovation. Every generation has their era of innovations- from trains to cars to planes to computers and online today.
If you think of investing with the view of owning a company for a lifetime, sometimes this can drive the necessary paradigm shift to keep your feet grounded during periods of great excitement and innovation.
If you are having trouble identifying the innovation companies that are investment quality as opposed to the others which are just all hype and so substance, we would recommend that you seek professional guidance. As always we would recommend that you contact AJ Financial Planning.