The performance of two of the year’s most highly anticipated IPOs—Uber Technologies Inc. (UBER) and Lyft Inc. (LYFT)—is underwhelming in early trading, and neither company has ever turned a profit. That should be more than a little worrisome for investors who recall the dotcom bubble of the early 2000s that saw a rash of unprofitable companies go public before eventually crashing. The comparison between then and now, however, is not perfect, according to the The Wall Street Journal.

The one major difference is that on their first day of trading, shares of Uber and Lyft experienced nothing close to the 81% pop exhibited by the shares of the average money-losing tech IPO during the dotcom era. On its first day of trading, Uber closed down nearly 8% from its IPO price of $45 and is still down 6.9%. While Lyft rose nearly 9% on its first day of trading, the company’s shares are down 25.3% from their IPO price of $72, as of the end of trading on Friday.

5 Takeaways From the Uber Meltdown

  1. Uber’s and Lyft’s declines worse than the average stock during dotcom era
  2. More sophisticated investors in 2019 unwilling to invest in companies with giant losses
  3. Uber’s IPO has poisoned the well for future IPOs in 2019, making it harder for other unprofitable companies in their offerings
  4. WeWork using troubling creative accounting to distract investors from losses will face tough IPO debut
  5. Some good news amid the gloom: Zoom and Beyond Meat IPOs posed stellar returns thus far, a stark contrast to higher-profile Uber.

Source: The Wall Street Journal

What It Means for Investors

One of the reasons for the divergence in performance between then and now is the sophistication of investors. In the late ‘90s and early ‘00s, investors were less discerning and willing to buy almost anything, including shares of companies hemorrhaging cash. With debt financing much more expensive at the time than equity financing, companies were all too happy to oblige investors’ demands. Today, while low interest rates motivate investors to look for higher-yielding assets, there is much less willingness to throw money at unprofitable enterprises, even high-profile ones. 

But the underperformance still comes as a surprise and is likely to have a negative effect on the offerings of other high-profile tech unicorns expected later this year, including Slack Technologies Inc. and The We Company, better known as WeWork. Lyft’s underperformance has already caused some of Uber’s private investors, like Allianz Global Investors who invested in the company over the past several years, to dump their shares. With both Lyft and Uber tanking, investors are likely to have even less confidence in the next tech IPOs. 

In order to restore some confidence, some companies are using creative accounting measures to hide losses. WeWork managed to turn an approximately $1.9 billion net loss last year into a $467 million profit by using the company’s preferred measure as opposed to generally accepted accounting principles (GAAP). But investors are not blind to these creative accounting tactics, which have also been used by Uber and Lyft.

Looking Ahead

There is some good news amid all the IPO gloom. Both Zoom Video Communications Inc. (ZM) and Beyond Meat Inc. (BYND) have posed stellar returns since their debuts earlier this year, up 150% and 257% respectively from their IPO prices. It’s also worth noting that both Amazon.com Inc.'s (AMZN) and Facebook Inc.'s (FB) shares struggled in their early days as public companies.