For a while I have been intrigued by the prominent money-losing (in terms of earnings) IPOs in the last few years, from cannabis stocks to cloud and big data, that have been welcomed by such high levels of interest. Why are money-losing businesses so attractive? Well, mostly because there is a good, attractive and convincing story behind them.
Almost two years ago, an FT articles was already referring to a very interesting time series by Mr. Jay R. Ritter from the University of Florida, who provides among others the number of IPOs and the %age of IPOs with negative earnings in the last 12 months before the IPO. The 2018 numbers were at the levels of the year 2000 «bubble». Two more years have passed and we are still at those levels. Ca. 80% of companies going public in the US have been losing money in the year prior to the IPO. While in 1999-2000 there was a jump only in these two years, we have been close to 80% for the last 4 years now.
There are enough Value-investors around comparing the current tech-stocks environment to that during the internet bubble, so warning about this is nothing new, but this is one additional element to be concerned about.
As usual, only time will tell if things are different this time, but one needs to be mindful about the risks and the potential of being carried away by trends and fashions, and take risks in a concious and controlled way.