Investment Warnings: Beware the rise of the loss-making IPO

We keep a folder of ‘red-flag market indicators’ – developments that make us very uneasy indeed – and one of them is the growing numbers of companies able to go public in spite of their negative earnings



Andrew Williams
Investment Director

For reasons our article Fear of the new from back in 2011 makes clear, we have always been wary of initial public offerings or ‘IPOs’ – when private companies list on a public stock exchange – here on The Value Perspective.

As such, our principal takeaway from a recent Economist piece suggesting IPO activity was on the up was actually the name of the US business academic whose data underpinned the accompanying graph.

While the Economist article highlighted the increasingly buoyant mood of the IPO market, the graph, which was based on data assembled by University of Florida professor Jay Ritter, showed the number of IPOs seen in the US in recent years to be very low compared with the late 1990s and the height of the tech boom in 2000 – and even well below pre-crash 2007 and the near-term high of 2014.

This led us to take a closer look at Ritter’s website, which contains huge quantities of IPO-related statistics, including the data that underlies the following graph.

This shows the percentage of IPOs with negative earnings every year since 1980 – and, as you can see, far from historic lows, 2017 is instead tied for second place with 1999 and nearing the historic highs of 2000.


Source: Topdown Charts, Jay R. Ritter, March 2018 (data updated 27 December 2017).


Breaking down the 2017 number a little, Ritter’s data shows 83% of technology company IPOs and no fewer than 97% of biotechnology IPOs had negative earnings.

And while those are the two sectors whose members you might expect to see in the loss-making camp, the data also reveals almost three-fifths (58%) of all other IPOs had earnings of less than zero last year – a record high.

As we have mentioned in articles such as Return of the ‘SPAC’, here on The Value Perspective, we keep a folder of what we might politely call ‘red-flag market indicators’, which are essentially news stories and other developments that make us very uneasy indeed.

It has seen quite a growth spurt in the last few years and now includes the above chart on IPOs with negative earnings.

The various experts quoted by the Economist may well be right the number of IPOs is set to surge from recent lows but it is striking so many that already do happen do not make any money.

With the percentages nudging up towards those last seen in the run-up to the dotcom crash, the implication is that it is easier to IPO a loss-making business towards the end of a market cycle.

It is definitely indicative of more risk-taking by investors.


Andrew Williams
Investment Director


The Value Perspective
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