The proportion of unprofitable companies floating on US exchanges has reached record levels, stoking fears the market could be headed for another dotcom bubble burst.
According to analysis by the Warrington College of Business at the University of Florida, 81% of the 134 firms listed publicly in America in 2018 were loss-making businesses and almost a third were tech stocks.
Harry Brennan in The Daily Telegraph writes that “the only time the percentage of publicly launching companies that made no profits at all was equally as high was in 2000, when 380 initial product offerings (IPOs) were recorded – the height of the dotcom bubble”.
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At that time investors poured money into start-up internet companies, betting on rapid growth and hopes of cashing in when their shares went public.
“Most of the dot-coms which listed on stock exchanges had done little more than consume vast amounts of investor cash and showed little prospect of achieving a profit” writes John Colley, a professor at Warwick Business School, on The Conversation.
“Traditional metrics of performance were overlooked and big spending was seen as a sign of rapid progress”, he adds, and when it turned out that many were failing to turn a profit, investment subsequently dried up and businesses collapsed.
Fast forward nearly two decades and 2019 “has been hailed the year of the tech ‘unicorn’ IPO,” says Brennan, “as private technology businesses valued at more than $1bn look to make their stock market debuts”.
Ride-hailing app Uber was one of the most high-profile, floating for $82bn (£65bn) in April, but then announcing a $1bn loss a month later.
Gregory Perdon, co-chief investment officer of private bank Arbuthnot Latham, has seen worrying parallels between 2019 and 1999.
“In the late 1990s, taxi drivers in New York would tell me which call options they were buying on which tech stocks - it was euphoric back then. I don’t think we are at those levels just yet but, equally, I don't think we are a million miles away,” he says.
In fact, says Matthew Vincent in the Financial Times, “some argue that the only real difference is that the taxi drivers are now the investment, rather than the investors”.
He continues: “As in 1999, there are plenty of people claiming ‘this time, it’s different’. Some point out that the high level of loss-maker IPOs reflects the number of biotech companies raising equity these days - which they must do to fund drug trials. Others note that in recent years, several loss-makers have turned into stock-market darlings”.
An oft-cited example is that of Facebook, which floated in 2012 at $38, falling to $20, before peaking last year at $210.
However, “for sceptics who feel they have seen this movie before, the performance of Lyft in the early days of its quoted life rings a few bells”, says Tom Stevenson in the Daily Telegraph.
Uber’s ride-hailing rival, Lyft, was priced at $72 a share when it debuted in March, jumping to $87 on its first day before falling back to around $63 today. “The pattern of initial pop followed by quick and panicky reassessment is directionally similar to the early trading seen in lastminute.com, the poster child of the dotcom era,” says Stevenson.
Like two decades ago, “traditional metrics have been ignored and user growth taken as a proxy for future profitability. But this requires an enormous leap of faith” writes Professor Colley, meaning “it’s only a matter of time before the app bubble bursts”.
