Watch Out for Zero-Revenue Companies Lurking in Your Portfolio

Revenue is the lifeblood of a company. Without it, companies can’t generate free cash flow and may have to rely on external sources of financing to stay afloat. With rising interest rates and recession fears looming, companies with no revenue are particularly vulnerable to big swings in share prices. These are early-stage companies developing products that don’t yet have revenue.

While there are ways to mitigate risks associated with investing in such companies, taking bets on the stocks of unproven companies with uncertain futures can be risky—and costly.

Dennis Lynch has not shied away from investing in high-growth, early-stage companies. Both Morgan Stanley Institutional Growth MSEGX and Morgan Stanley Institutional Discovery MACGX own Aurora Innovation AUR, a self-driving technology company that didn’t have any revenue over the trailing 12-month period through 2025’s first quarter. That stock soaked up 3.5% of the former portfolio’s assets and 3.4% of the latter’s assets as of June 2025. While the stock’s 103% cumulative runup from July 2024 through August 2025 helped fuel the portfolios’ recent success, it also weighed heavily on performance in 2022. The stock fell nearly 90% that year, and each strategy landed in the bottom percentile of its Morningstar Category.

Harbor Small Cap Growth HISGX doesn’t take large individual stock bets like the Morgan Stanley funds, but its zero-revenue holdings have added up. As of April 2025, five holdings—all biotechnology firms—didn’t make any money and made up 5.2% of the portfolio’s assets. MoonLake Immunotherapeutics MLTX was the largest position of the bunch in April 2025 at 1.7% of assets, but the team trimmed the position to 0.8% of assets as of June 2025. Since the team first bought it in mid-2023, the stock’s 4.2% annualized gain through August 2025 weighed on relative performance. Rocket Pharmaceuticals RCKT, which the team bought in early 2020 and was a more modest 0.5% position in April 2025 before the team sold it by June 2025, fell roughly 90% since the start of 2024 and was another laggard.

Like Harbor Small Cap Growth, Amy Zhang’s Alger Small Cap Focus AOFAX owned MoonLake. Akero Therapeutics AKRO and Forte Biosciences, also biotech companies, were the other two holdings in the fund’s June 2025 portfolio that made no revenue over the trailing 12-month period. Combined, these three companies soaked up 2.6% of the portfolio’s assets.

This strategy’s struggles in recent years have been partly due to Zhang’s willingness to hold on to speculative growth stocks with poor fundamentals. For instance, Cabaletta Bio CABA, which Zhang owned from January 2023 through January 2025, had no profits and fell 75% cumulatively over the period. Such mistakes have weighed heavily, contributing to the fund’s bottom-decile performance in 2021, 2022, and 2023, and bottom-quintile results through the first eight months of 2025.

This article first appeared in the August 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.