The 2019 IPO wave, which is on track to raise even more money than the record year of 2000, is likely to avoid the disastrous stock meltdown seen after the infamous 2000 Dotcom Bubble, according to several experts. While many are concerned about large losses at companies such as Lyft Inc., the first of the LUPA companies expected to go public this year, a meltdown is unlikely to occur for several key reasons, per the Wall Street Journal.
Why IPOs of 2019 Will Survive
(Comparison of 2019 IPOs vs. 2000 IPOs)
- Company Age: 12 years vs. 4-5 years
- Company Size in Annual Sales: $174 million vs. $12 million
Source: IPO Expert Jay Ritter, per WSJ
In 1999, 547 companies hit the public markets, raking in a total of $107.9 billion, per Dealogic. Now, bankers who arrange IPOs say 2019 may surpass that total, with more money raised by fewer but bigger names like Pinterest Inc., Slack Technologies Inc., Uber Technologies Inc. and Postmates Inc.
These companies' newly public shares are far less likely to melt down as occurred with the class of 2000. For one, companies in the class of 2019 are far older, bigger in size and more sturdy as far as finances and management skills. The median age of today's tech IPOs is 12 years, which is two to three times the age of tech IPOs in 1999 and 2000, at four to five years, according to IPO expert Jay Ritter. Meanwhile, the median sales of the latest class of IPOs is nearly $174 million, more than 14 times bigger than the median $12 million in sales for the years 1999 and 2000.
Revenue Drives Outperformance
Many bears cite mounting losses at these companies, with Uber at a $3.3 billion loss in 2019 and Lyft at $900 million. But many of the new techs have succeeded in bulking out their revenue streams in new markets. Uber raked in $11 billion and Lyft generated over $2 billion in 2018.
This revenue size historically has increased the chances of outperformance, per the Journal. Shares of 1999 and 2000-era companies with sales over $100 million beat their peers under that threshold by roughly 45%, whether or not they were turning a profit, studies show. “Tech businesses generally have big fixed costs, and the more revenue you can stretch across those costs, the more drops to your bottom line,” said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.
The companies in the class of 2019 have been able to build their businesses and carve out stakes in high-growth markets whose size is drastically different from those of the failed 2000 Dotcom startups such as Pets.com, EToys Inc. and Webvan, per Ritter.
Not all are so upbeat about the class of 2019, whose inability to turn a profit and “questionable business models” has kept some investors on the sidelines. In a recent WSJ column, James Mackintosh argues that buying stock in a newly public company - just as insiders and venture capitalists may be selling their shares - is a dubious proposition.