The IPO market in 2019 has unsettling parallels with the dotcom bubble of the late 1990s. In particular, based on IPOs worth at least $100 million each, unprofitable companies collectively raised more cash in 2019 than in any other year since at least 2000, per a detailed report in Bloomberg.
“It used to be an article of faith that you couldn’t go public until you turn a profit,” as Rett Wallace, CEO of Triton Research Inc, which specializes in new listings, told Bloomberg. “Not a path to profitability, a profit," he added. In the dotcom crash of 2000-2002, the Nasdaq Composite Index (IXIC) plummeted by 77% and the S&P 500 Index (SPX) tumbled by 45%.
Significance for Investors
“What you’re seeing is much deeper J curves,” Wallace said. That is, investors are content to endure post-IPO losses for longer periods. “You lose more money for longer and the area in the J curve is bigger. It consumes more money than the earlier generation of comparables you saw, like Amazon,” he added.
High-profile IPOs of unprofitable companies in 2019 include ride hailing services Uber Technologies Inc. (UBER) and Lyft Inc. (LYFT). Their shares are down by 33% and 43%, respectively, from their offering prices. Excluding one-time gains, they lost $3.3 billion and $900 million, respectively, in 2018.
WeWork Pulls its IPO
Meanwhile, another 107 companies have filed to go public, many of them also money losers. WeWork, which officially changed its name to the We Company, had filed to go public at a valuation approaching $50 billion. But the company and its underwriters officially pulled the IPO on September 30, 2019, after the co-founder and CEO Adam Neumann stepped down amid criticism, and the company failed to attract enough institutional support for its public offering
Nonetheless, since 1999, almost 50% of IPOs for unprofitable companies outperformed the broader market during their first year of trading. Unprofitable new IPOs also outperformed the market in each of the last four years, and so far in 2019.
In many IPOs today, as in the dotcom era, investors are asked to "bet on unproven technology and untested revenue models," as Bloomberg summarizes the situation. "You got to go out a very extended period of time, and assume some market size and then usually an obscenely high market share for the one company that is coming out," as Jeffrey Osborne, an analyst with Cowen, told Bloomberg.
Tech IPOs dominated the dotcom era, but today marketers of supplements based on cannabis-derived compound CBD are also among the hot new companies. “Like much of the rest of cannabis, public opinion has moved much more quickly than both the science and the law,” as John Kagia, chief knowledge officer at cannabis research firm New Frontier Data, told Bloomberg.
Citing electric car maker Tesla Inc. (TSLA) as an example, Osborne remarked, "Luckily for Elon Musk, he has been in a bull market for six or seven years." Despite being down by 36% from its recent intraday high on Dec. 7, 2018, Tesla trades at more than 14 times its $17 offering price in 2010. “These types of names go completely out of favor in a recessionary environment," he added, in a cautionary note.
On the other hand, there may be some positives today. Jay Ritter, a professor of finance at the University of Florida who has specialized in studying the IPO market since the early 1980s, told the Wall Street Journal: "Back then [during the dotcom bubble], a lot of companies went public at very early stages when it wasn’t apparent what the shakeout was going to be in a certain niche. There’s less uncertainty now.”