EDITOR NOTE: Wall Street is always excited about venture capital-backed IPO issues; so are regular retail investors. For instance, last week’s DoorDash IPO ended with a market cap three times the amount of its last private valuation. AirBNB garnered the highest IPO valuation in history--over $100 billion. Smart investors know that many of these “unicorn” companies may hold more potential than proof in earnings. It’s a speculative endeavor that hopes to see positive earnings sometime in the future. It doesn’t always turn out that way, however. So, are investors so eager to lose money, as this article claims? It depends on the investor. Most don’t know what they’re doing--and we all know friends who lost fortunes not on making poor bets but on betting poorly (no matter how good or bad a bet it was). Sure, make a speculative bet. But hedge it by diversifying across multiple asset classes. And don’t forget the ultimate hedge--that of sound money itself--to protect your paper wealth against devaluation (which is in the Fed’s pro-inflationary framework).
The hunger for new issues is voracious and bankers trying to pad year-end bonus numbers can't keep up. Their new stocks are making money, but the companies themselves certainly are not.
Here's the Wall Street Journal, writing about DoorDash (abbreviated, with highlights added):
"DoorDash Inc. delivered for investors, surging 86% in its stock-market debut on Wednesday. The seven-year-old company ended its first trading day valued at about $71.8 billion, higher than many of the restaurant companies that depend on its couriers. The San Francisco-based company has never turned an annual profit, but a surge in demand during the Covid-19 pandemic has helped to transform it."
Using Bloomberg data going back to the early 1990s, let's look at the total number of U.S. listed initial public offerings that showed a negative net income at the time of the offering. If they didn't report financials at the time, then we ignored the listing.
Over the past year, there have been 88 IPOs that showed a negative number on the net income line. That exceeds all other rolling one-year periods except for 2000.
But that year also had quite a few IPOs that were actually making money at the time. If we look at a ratio of money-losing to money-making companies that issued shares, the current environment stands out.
Part of the reason why so many companies are going public without turning a profit first is that they just haven't had time to do so. The median age of a company going public over the past year is barely 5 years old. The CDC suggests that a human child doesn't understand the concept of the future tense until their 5th year. Maybe companies aren't much different.
Originally posted on Sentiment Trader