The WSJ reports that the current IPO frenzy featuring the likes of Lyft, Uber, Pinterest, Postmates, and Slack Technologies is different than the IPO frenzy in 1999.
Then, many of the firms coming public had little more than a half-baked business plan. The current crop of IPOs includes more established businesses with average annual revenues approaching $200 million.
Despite the higher revenue generation, profitability is just as elusive for firms coming public in 2019 as it was in 1999.
Maybe this time isn’t so different after all.
The WSJ has more details below.
One trait that many in the 2019 class share with their predecessors from 20 years ago: They’re still losing money. Uber and Lyft have staked out formidable positions in the ride-hailing market, though both have incurred considerable losses in doing so. Uber lost $3.3 billion last year, excluding a one-time gain, while Lyft lost more than $900 million.
Still, they’ve managed to prove that the business model of hailing a ride with an app is here to stay. Uber has built a revenue base of more than $11 billion, while Lyft took in more than $2 billion last year. Lyft has roughly 30% of the U.S. market while Uber commands almost all of the rest, and is a powerhouse in several markets overseas.
So while there might be less room to make a killing on this year’s crop, there’s also lower likelihood of failure. According to Mr. Ritter’s analysis, shares of companies with more revenue tend to perform better.
Take the companies that debuted in 1999 and 2000. Three years later, the shares of companies with sales of more than $100 million had outperformed those of companies with sales under that threshold by about 45 percentage points, whether or not the companies in question made money, according to the analysis. The same rough pattern holds up in the post-bubble period.
“Tech businesses generally have big fixed costs, and the more revenue you can stretch across those costs, the more drops to your bottom line,” says Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.
Larger companies still tend to perform in line with the market. The younger—and smaller—a company is, the harder it is to predict its future trajectory. For every Amazon, there are multiple Webvans. Of the 856 IPOs from 1999 and 2000 tracked by Mr. Ritter, 272 had lost more than 90% of their value after five years.
Read more here.
Jeremy Jones, CFA
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