Weird Reasons Why Loss-Making ‘Losers’ Are Valued Insanely High

Ever wonder why loss-making “loser” companies are sometimes valued very high? You might think stock investors are crazy, that it’s just not fair? Today, I want to explain why some loss-making companies are actually great businesses.

Let me give you an example: Snowflake. Snowflake provides tools that make big data analysis in cloud servers easier and better.

Snowflake doesn’t own servers – it just connects cloud servers like AWS with customers, and adds their tools on top of those cloud servers.

The average customer pays $300K/year, so only big companies use its services. Accumulating and analyzing big data is crucial for companies to gain competitive advantages. They can cut costs and sell more using the data. For a company, this easily justifies the $300K+ cost.

This company is really strong because it can generate cash flow from operations, invest that in the business, create more cash flow, and repeat this cycle again and again.

Failing businesses, on the other hand, struggle to get cash out of their operations. This means no investment for the future, leading to less cash flow, and the situation keeps getting worse.

Look at their financial statements. Net loss in 2024 was -$837M, yet operating cash flow was +$848M. They’re generating cash even while showing losses. This disparity is crucial. The company is using plenty of cash to invest in the future and gets more cash every year.

The main investments are in sales and marketing and R&D.

1. Sales and marketing:

For some companies, sales and marketing expense is just a one-time cost. You publish ads, get a client, provide service, and they leave – that’s it. For some businesses, however, it’s a great investment for the future. Snowflake is one of these. The retention rate compares how many customers remain from the previous year. If your customers spent 100 last year, and 10% left, making this year’s sales 90, the retention rate is 90%. But for Snowflake, it’s more than 110%! This is possible when, for example, your customers bring in people from different divisions of the same company, or they increase their use of your service year over year.

This is mainly due to its business nature. Data keeps accumulating, and since the company charges based on data usage, customer spending keeps increasing yearly.

Also, it’s difficult to quit. Migrating big data out of Snowflake is costly. They may impose penalties. The migration process is complex, especially for companies with large amounts of data. This process is time-consuming and can disrupt the company’s operations. Since Snowflake’s platform is integrated with the company’s operations, switching to another service is very difficult.

So when the retention rate exceeds 100%, the previous year’s customer spending not only remains but increases this year, becoming a cash-generating asset forever without needing new advertising or sales efforts. Sales keep accumulating each year, making sales and marketing spending an eternally effective investment. It’s like buying a property that generates income every year – more of an asset than a cost. Normally, costs are consumed and vanish immediately, but in this case, spending creates long-lasting value that increases yearly.

2. Research and Development:

Another major cash expenditure is R&D. Making the product better increases service satisfaction, keeping retention rates high and reducing sales and marketing costs by letting the service sell itself.

That’s why spending on these costs and showing losses is justifiable. If they tried to keep the company profitable by restraining investment in these areas, that would anger investors. They need to invest their cash as much as possible, well exceeding operational profit. This will maximize future cash flow.

The company’s cash flow generation supports this strategy. I mentioned the gap between net income and operational income – this comes from their cash-generating strategy. Since the company is valued highly in the stock market thanks to its all-in investment in sales, marketing, and R&D, they can pay salaries with stock options. Paying salaries without cash saves significant cash outflow.

Additionally, much of their revenue comes from pre-paid services (annual payment), which increases cash especially when sales grow.

Being a cloud server company without owning servers is huge. If they had to own servers, every business expansion would require a massive initial investment, leaving them with no cash. But Snowflake just connects servers and customers, so even rapid sales growth requires minimal infrastructure investment.

They made a loss of $800M but had operational cash flow of +$800M, allowing them to invest that $800M in R&D or sales and marketing while still maintaining positive cash flow – no problem. Investors would even encourage spending more, creating bigger paper losses.

To sum up, if you want more cash in the future, spend more cash now on promising businesses, not stupid ones that keep absorbing cash while producing nothing. Also, don’t pursue profit – pursue cash flow.