IPO Market Accepting Money-Losing Firms

“Stock investors are welcoming money-losing companies into public markets this year with open arms,” according to an article in The Wall Street Journal.

Citing data compiled by University of Florida finance professor Jay Ritter, the article reports that about 83% of U.S. listed IPOs in the first three quarters of 2018 involved companies that “lost money in the 12 months leading up to their debut,” which the professor says is the highest percentage on record.

This has caused concern for some, who see similarities with the dot-com bubble of 20 years ago. The article suggests, however, that today’s “class of technology IPOs is in a bit better shape than that of the dot-com era: In 2000, just 14% of tech companies listing shares in the U.S. were profitable, compared with 19% so far this year” (according to Ritter’s data). Also, today’s group of unprofitable listers includes more than just tech—there has also been a surge in newly listed biotech firms.

So far this year, the article reports, Investors putting up with red ink have been rewarded and happy investors have “powered a surge in new listings.” Dealogic data shows that more than 180 companies raised over $50 billion in IPOs in the U.S. in the first three quarters of 2018, putting this year on track to be the busiest for new issuance since 2014.

Even with the uptick in IPOs, the article says, “the number of public companies overall has been in historic decline and many of the hottest startups of recent years, such as Uber Technologies Inc. and Airbnb Inc., are staying private longer”—which may explain the hearty investor appetite. But Ritter says, “The problem with young growth companies where investors have built in really optimistic assumptions is that if the company doesn’t deliver, it can get revalued in a heartbeat.”

“For now,” the article concludes, “investor fear of missing out on a rally is trumping such concerns, as major stock indexes trade near records.”