Stalled out: Why the rush of IPOs from big, unprofitable companies like Uber and Lyft could throw the entire market off track

Stalled out: Why the rush of IPOs from big, unprofitable companies like Uber and Lyft could throw the entire market off track

Uber and Lyft are having a rough ride in the public market. While companies often overcome difficult debuts, the struggles for those high-profile companies could become a bigger problem for the stock market.

That’s the reading of Michael Arone, chief investment strategist for State Street Global Advisor’s US SPDR business. While some investors have been looking forward to a chance to invest in former unicorns like the ride-hailing apps and other companies like Pinterest and WeWork, Arone thinks the stage is set for disappointment.

It’s no secret that many of these companies aren’t making money. Lyft, the most extreme example so far, lost almost $1 billion in the year before it went public— the most of any company in history. Arone says the venture capital investors who’ve helped build those companies can be patient about those kinds of losses, but Wall Street may not be.

“Public investors take a shorter-term, reactionary approach to investing, so expensive, unprofitable companies haven’t fared well traditionally,” he wrote in a note to clients.

Over the three years following their IPOs, Arone says, money-losing companies have lagged the market by 9.7% while their profitable peers have beaten the market by 7.9%.

That’s becoming the norm, which Arone illustrates with this chart. It shows that the tech companies going public in recent years are less likely to be profitable than in the past — and they are older relative to past companies at the time they made their market debuts, and he says that means they’re less likely to become profitable in the future.

The tech companies going public today are both older and less profitable than those in the past, according to Michael Arone of State Street Global Investors.
IPO filings, Jay R. Ritter

“Eighty-four percent of companies looking to IPO today have no profits, up from 33% just a decade ago,” he said.

So what if some IPOs flop? The problem is that a unicorn gold rush is beginning: more than 100 privately held companies valued at $1 billion could go public this year. That’s up from 33 in 2017 and 2018 combined, according to Arone — and if many of the biggest names hit a wall, it could weigh on the market for a long time.

“If underperformance of these blockbuster listings becomes the straw that breaks the unicorns’ backs, the bull market could feel the pain,” Arone said.

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