Why stocks with negative earnings are beating S&P500 return?

We all know the stock market went crazy over the last 24 months. From the NVDA frenzy to TSLA insane valuation the stock market has been on what is now 2 year old bull run delivering over 20+% in each year. But things have gone even crazier than PLTR insane P/E ratio - 123 companies that had negative EPS have outperformed S&P500 in 2024! Yeah, it wasn't a typo - there are 100+ companies that have losing business and yet gained more stock market return than the main index!.

We know that even companies with negative earnings can have positive returns on the stock market, this is not that unnatural. There are several scenarios that it is completely logical that even losing companies are getting attention by investors:

• "Start-up star" - if a new innovative company that it is still developing its product is listed then it is completely normal that the earnings are negative aftr all the business is not yet mature. At the same time if the product is really promising then it is okay if investors are buying the stock and raising the price in order to get in early on the future profits. Usually those companies have very high R&D costs and quickly rising revenue, but not yet to the point that it produces positive net income.

• "Recovering wounded giant" - lots of successful companies fall into trouble and destroy their value, in almost all cases the management starts some kind of a recovery programme -restructuring, innovation, cost saving etc. If their plan turns to be successful then they begin to gain back the trust from investors, such a turnaround is quite possible and totally okay with every economic logic there is. Usual indicators of such recovery is reduction in operating costs (meaning the business is being streamlined) and growth in revenue.

Those cases don't brake any economic wisdom, but to also have those companies outperforming the market (mainly consisting of good earning businesses) means that investors have gone a little too far in getting excited about those losing companies and their future prospects. So how the numbers looked during 2024.

To understand how the market valued those particular companies we divide the market into 4 groups:

• Positive earnings, Return smaller than S&P 500 - those are companies that had positive EPS and net income, but didn't outperformed the index in 2024;

• Positive earnings, Return bigger than S&P 500 - those are companies that had positive EPS and net income, and also outperformed the index in 2024;

• Negative earnings, Return smaller than S&P 500 - those are companies that had positive EPS and net income, but didn't outperformed the index in 2024;

• Negative earnings, Return bigger than S&P 500 - those are companies that had positive EPS and net income, and also outperformed the index in 2024;

What we are interesting in is the last group, those seemingly losing business that earned the trust of investors so much that their return was higher than the average of the market. As usual we have several charts to help us understand the dynamics.

First is something that is absolutely critical - how the revenue of the companies is growing. Here we are comparing the trailing 12M revenue growth at the start of the year vs the same metric a year later at the end of 2024:

This chart is very sensible! Obviously companies that outperformed S&P 500 have actually accelerated their growth in 2024. Also very logical the last group that has negative net income, but outperformed the index increased its revenue growth from 3.6% at the start of the year vs 8% in the end. It is absolutely necessary for every outperformer to accelerate its growth as this is what investors are betting on. At the same time companies that lagged behind the index logically saw their revenue take a step back in growth.

So far so good, but this constant increase in stock market prices leads to more and more insane valuations, so how we are doing on this front? To gain insight here is the comparison between our 4 groups of their Price/Sales ratio as % of Sector median.

We are using the Price to Sales as it is more suitable to value our focus group - companies with negative earnings. This metric shows that at the start of 2024 those losing companies that outperformed S&P had their P/S ratio about 84% of their respective sector, meaning they were relatively undervalued. But at the end of the year this had jumped to 147%! Again this is pretty in line with economic logic so those companies even though they have negative earnings they are increasing their revenue and investors are getting more and more attracted and keep valuing those sales up and up. Overall the increase in valuations of each group is:

So this is where it gets a little crazy. Out of all companies it seems that exactly those with negative earnings that have outperformed S&P increased their market valuation the most with astonishing 80% increase. While companies with good positive earnings that beat the market only increased their valuation by 35% so it easy to spot the increased hype. All of this is a sure sign of the bull market going crazy and speculative, in such fast and loose environment there is a lot of "free money" and investors are willing to take bigger risk on those losing companies.

In order to get deeper insights on what is going on with those companies we will take a look at 4 specific examples that cover the most interesting scenarios - Rocket Lab (RKLB); Marvel Technology (MRVL), DoorDash (DASH) and Samsara (IOT).

• Rocket Lab USA, Inc. (RKLB) - Founded in 2006, Rocket Lab is a space systems company specializing in launch services and satellite solutions. It designs and manufactures the Electron rocket, a small satellite launch vehicle, and Photon, a spacecraft platform for various missions. Rocket Lab focuses on making space more accessible by offering cost-effective and frequent launch services to deploy small satellites into orbit. It is the perfect example of very innovative business in a industry that is just rising. Also since it is high tech it is normal that R&D costs a sky high and drag financial performance.

• Marvell Technology, Inc. (MRVL) - Established in 1995, Marvell is a global semiconductor company that develops and provides integrated circuits and related technology for storage, communications, and data center markets. It plays a key role in delivering high-performance networking, data storage, and security solutions, catering to industries like cloud computing, 5G, and automotive markets. Example of old and large company that operates in a currently developed and booming sector. In this case it is important the turnaround from loss to profitability and then the sector will guarantee good stock performance.

• DoorDash, Inc. (DASH) - Launched in 2013, DoorDash is a leading online food delivery platform that connects customers with local restaurants and other retailers. Its main business revolves around providing last-mile logistics solutions, enabling food and goods delivery from a wide range of merchants. DoorDash also offers additional services like DashPass, a subscription service for delivery discounts. This is the case wher ethe company already had its frenzy but unfortunately went the wrong way financially so it is looking to re-ignite investor's dreams about its product.

• Samsara Inc. (IOT) - Founded in 2015, Samsara specializes in providing Internet of Things (IoT) solutions for fleet management, industrial operations, and logistics. The company’s platform combines hardware, software, and cloud technology to help businesses improve operational efficiency, safety, and sustainability by tracking assets, vehicles, and industrial processes in real-time. The last example is a very small company that operates in a sector that had already passed the investor's frenzy and now companies are being valued more reasonably (at least should be) so the company is trying to streamline its business model after the initial revenue growth.

All of four companies had negative on 2024 (and still do in 2025), but their stocks rose more than 24% during 2024 alone. So lets take a closer look at their financials to get an idea what is behind that investor's confidence.

We start with most obvious place - the income statement. We know those are 4 companies that have negative net income, so lets see where their business model breaks:

RKLB, MRV, DASH, IOT latest income statement

All 4 companies have different levels of revenue, but it is crystal clear what happens afterwards. All 4 have positive Gross profit, and at the same time all 4 have negative operating income! So it is apparent that in all 4 cases the profit turns negative between the gross and operating incomes. For those not into financial accounting, those costs that sit between the two lines are - Selling, general & Admin (SGA), Research and Development (R&D) and Depreciation & Amortization (D&A). So those costs are stopping them from becoming profitable companies. In the cases of RKLB and IOT it is okay that their R&D cost is high since those are relatively undeveloped business that require a lot of investment, same goes for MRVL with the fast pace Semiconductor sector. BUT there are few interesting observations to be made:

• In the case of RKLB the SGA costs are about a 1/3 of revenue, which is a big red flag since it seems they are spending quite a lot on support functions that have nothing to do with their product;

• MRVL does have streamlined business as SGA is relatively low but still can be optimized, but they do have 2bln USD in R&D costs which is fine but a big risk if it doesn't produce revenue growth in upcoming years;

• IOT has excessivly large IOT, it is normal for those companies that experienced sudden growth to find themselves with highly sub-optimal corporate model, but spending almost 80% of your revenue on SGA support functions is a sign of bad and failing company, not a market's top performing stock.

  
  

To try to explain what investors like so much about those companies lets dig even deeper into the trend of their key SGA and R&D costs. Next chart represents the trend of their SGA costs as % of revenue:

This is starting to make sense! Previously we found that all 4 companies have issues with rather excessive SGA costs. This chart shows that all 4 are making great strides in optimizing those costs as they decline over time. For example RKLB spend 88% of their revenue on those support functions in Q1-2022 but now those are down to 32%. Similar argument can be made for the other as well, IOT reduced from 104% to below 70%, DASH from almost 50% to about 33% and MRVL slashed theirs by 4%. Remember this is presented as % of revenue, so either the cost went down or the revenue went up more, in any case it seems all 4 stocks have strong trend to increase revenue faster than their SGA costs meaning their streamlining their business. This is very strong argument because if a high-growth company is optimizing its business then even that now it has negative profit this means in the future it will turn around. Investors sensibly like those opportunities and keep pouring money into those businesses thus raising the returns.

The other huge necessity for those companies is the continuing growth of revenue. Because investors basically are buying not the current earnings (they are negative!) but rather future earnings when the product is stable. So we do need to look at how this companies are investing in their future products - their R&D costs! Here is the trend of those cost presented as % of revenue:

What we are looking in this chart is whether those companies are continuing to pour in resources for developing their product. Certainly if the company was in bad financial situation without promising product won't be separating cash for development, rather it will put them in the current business trying to maximize. But if the company has that magical promising product it will keep developing it with more and more R&D costs. In the case of our 4 companies they seem to have pretty stable R&D costs as % of revenue even as they have negative profits. DASH has stable 10-11% level, while MRVL has around 35-36%. The investors favorite RKLB actually increased its R&D spending from 34% at the end of 2022 to 45% . This is one of the primary reasons for investors attention of those companies.

Overall in order for a company with negative profits to have stock return higher than market's are revenue growth, business model optimization (lowering SGA cost) and continues investment in product development (increasing R&D). But obviously there is a risk to it! So investors MUST be very very careful when playing around!