The last time unprofitable companies went public at this rate was in 2000 — the year the dot-com bubble burst.
Lyft filed paperwork to become a public company last week, with a valuation of $15 billion. But the ride-sharing company is still deeply unprofitable.
The company had a net loss of nearly $1 billion last year. To put it another way, Lyft lost about $1.47 for every ride* it gave in 2018. Lyft’s main competitor Uber, which is poised to file for an IPO as well, is also posting losses on a per-trip basis (though it’s tricky to estimate how much since Uber includes Uber Eats deliveries and Uber Freight shipments, in addition to taxi and scooter rides, in trip estimates). Uber’s valuation is expected to be anywhere from $76 billion to $120 billion.
So why aren’t the public markets more concerned about these negative-balance-sheet [sic] behemoths?Because IPOs by money-losing companies are more common than ever. In 2018, 81 percent of US companies** were unprofitable in the year leading up to their public offerings, according to data from Jay Ritter, an IPO specialist and finance professor at the University of Florida. That’s a statistical dead heat with the rate in 2000, the year the dot-com bubble burst, plunging the US economy into recession. It’s the only other time unprofitability was this high, according to Ritter’s data, which goes back to 1980.
Much of the rise in unprofitability has to do with the proportion of biotech companies going public. These companies for the most part don’t have a product, let alone profit, when they sell stock to public shareholders. Instead, they use IPOs to raise money for their expensive clinical drug trials. Biotech companies are a big gamble and are frequently duds, but the success cases pay off well and can be acquired by big pharmaceutical companies. Investors in these companies also tend to be specialists in the biotech industry so, presumably, they know what they’re getting into.But even without those biotech companies, investors have shown a growing comfort with unprofitable companies, Ritter’s data shows. About half of non-tech, non-biotech companies that went public in 2018 were unprofitable in the year leading up to their IPO.Some 84 percent of tech companies that went public in 2018 were in the red. Typically, investors expect them to be profitable within a year or two, depending on the company.
Why would people invest in unprofitable IPOs?
“The rise in unprofitable IPOs reflects the general preference in both public and private markets for growth over profitability,” Paul Condra, lead analyst of emerging technologies at startup research firm PitchBook, told Recode.“As we’ve seen during most of the recovery period since the Great Recession, investors are not so margin-focused, but continue to put a premium on businesses with long-term future expansion or disruption potential.”...MUCH MORE
