Why does Xero have a market value of $3,350 million when it reported a loss of $67.1 million for the March 2017 year? Why does Rakon have a market value of only $22m when its March year loss was only a one-fifth of Xero’s.

Loss making companies (31 March balance dates)

The valuation of these loss making companies is based on expectations, rather than fundamental valuations. Investors continue to believe the Xero story but they have given up on Rakon. Pushpay is still viewed positively but investors are losing confidence in Orion Health as its share price has plunged from a 2014 high of $6.79 to $1.05.

Investors purchase shares in loss making companies because they are looking for the next Mainfreight or Ryman Healthcare or, even better, the next Amazon.com, Apple, Facebook or Google.

Mainfreight and Ryman Healthcare weren’t loss makers when they listed but they were relatively unknown and unproven.

Mainfreight, which had a net profit after tax of $4.7m when it listed in 1996, reported net earnings of $101.5m for the March 2017 year. Ryman Healthcare had raised its net earnings from $6.2m before listing in 1999 to an underlying net profit of tax of $178.3m for the March 2017 year.

These are two of the best performing NZX stocks over the past two decades. But companies with a global reach have generated much higher returns. Amazon.com listed in on the Nasdaq in 1997 after issuing shares to the public at US$16 each. Since then it has had a 2 for 1 share split, a 3 for 1 split and another 2 for 1 split.

Its shares are now trading in excess of US$1,000 compared to an adjusted purchase price of US$1.33 per share adjusted for the splits. Thus, a US$1,000 investment in Amazon in 1997 is now worth more than US$750,000.

The amazing feature of this story is that Amazon.com operated at a loss until 2003, has reported a loss in eight of its twenty years since listing, has average earnings of only US$247m since 1997 yet has a current sharemarket value of US$481 billion.

The Amazon.com story clearly illustrates why investors can be attracted to loss making companies.