AI Wealth Truth (51): Why "User Growth" Matters More Than Profit

I. A company loses money year after year, yet its valuation keeps rising. Investors say: do not look at the losses, look at "user growth". Growth matters more than profit. Is this logic correct? Correct for whom?

II. Behind this is the network-effect valuation model. The logic goes like this: the more users you have, the more valuable the platform becomes (network effects). The more valuable the platform becomes, the more users it can attract. This creates a positive feedback loop. So it is fine to not make money early on. First, pull users into the network.

III. This model can work in theory. WeChat, Taobao, and Meituan grew this way. They burned cash and subsidized users, built a user base, and monetized later. The question is: who actually wins this game?

IV. Let us break down the value distribution:

V. Founders and early investors. They acquire equity at the lowest cost. When the company goes public or gets acquired, they exit at huge multiples. Even if the company fails later, they may have already cashed out. They are the biggest winners.

VI. Late-stage investors. They enter at higher valuations. Their upside multiple is lower. And their risk is higher because the valuation is already high. They are mid-level winners, or losers.

VII. Public investors (retail). They buy at the IPO or in the secondary market. Often at the highest valuation. If the company cannot become profitable, they become the final bag holders. They are often the losers.

VIII. Users. Early on, they enjoy subsidies: cheaper rides, cheaper delivery, cheaper shopping. Later, they pay through price increases when subsidies end. The cheap price is temporary.

IX. This is a hot potato game.

X. Early participants enter cheap and sell to the next group at a higher price. The next group sells to an even later group. In the end, the last buyers get stuck. When the music stops, the ones still standing lose.

XI. How is this different from a Ponzi scheme?

XII. A Ponzi scheme has no real business. These companies have real users and real operations. But the valuation logic is similar: new money supports old valuations. If growth stops, valuations can collapse.

XIII. Many "unicorns" never became profitable.

XIV. WeWork's valuation once reached $47 billion. After the failed IPO, it crashed by more than 90%. Uber and Lyft traded below their IPO prices for a long time. Many companies still have never made a profit. The story "grow first, profit later" often has no "profit later".

XV. In the AI era, this model is being copied again.

XVI. AI companies raise money aggressively. Valuations surge. OpenAI is valued at more than $150 billion. Almost all AI unicorns are losing money. Investors say: AI will change everything, take the position first. How is this different from the last internet bubble?

XVII. One possible difference is: AI does have transformative technical power. But that does not mean every AI company will succeed. Historically, when a technology changes an industry, only a few companies win and most participants fail. The revolution can be real, and the company you buy can still be a loser.

XVIII. How can ordinary people avoid becoming the final bag holder?

XIX. 1. Do not chase at the top. When everyone is talking about a company, its valuation is often already high. The real bargains exist when nobody is talking. Hot usually means expensive.

XX. 2. Look at profitability, not only growth. Growth can be bought by burning money. Profitability is the real moat. Ask: when can this company make money? What is the path? Growth without a clear profit path is dangerous.

XXI. 3. Know where you are in the food chain. Are you an early investor, or retail? Do you have information advantage, or information disadvantage? Most retail investors sit at the bottom.

XXII. 4. Buy the index, not the single stock. If you cannot tell who will win, buy the whole market. An index holds the winners and dilutes the losers. It reduces single-stock risk.

XXIII. "User growth matters more than profit" is a story one investor tells the next investor. Eventually, someone pays with real money. That person might be you.

XXIV. In the AI era, this story sounds even more convincing. "AI will change everything!" sounds reasonable. But history tells us: in most technological revolutions, most participants lose. Not every AI company will become the next Google. Most will become the next WeWork. Distinguishing winners from losers requires information and skill. If you do not have them, do not play this game.