Beware markets that view losses as ‘the new profits’

2018 is on course to beat even 2000 as the record year for flotations by loss-making companies – suggesting investors are now as enthusiastic as they were at the end of the dotcom boom to pay up for future hope


Andrew Evans

Andrew Evans

Fund Manager, Equity Value

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own.

                                                                                                        - Warren Buffett

Earlier this year, here on Then Value Perspective, we raised a red flag about the alarming rise of the loss-making initial public offering (IPO). Data assembled by University of Florida professor Jay Ritter going back to 1980 had revealed the percentage of IPOs with negative earnings in the US in 2017 had equalled 1999 and was only slightly behind the 81% all-time high of 2000, which of course marked the top of the dotcom boom. 

This was, we said, a definite sign of more risk-taking by investors so one might hope such optimism would have tempered a little since. One would hope in vain. With the numbers now crunched for the first three-quarters of this year, Ritter’s data shows 2018 is firmly on course to beat that number – as you can see from the following chart, 83% of companies to have floated in the US to the end of September do not make a profit.

Biggest year for IPOs

Money-losing companies are less forgiving in the long run, Ritter recently told CNBC, adding: “The average return on the first day has been about the same, but over the next three years the profitable company IPOs have beaten the unprofitable company IPOs by about 6% per year. This pattern of profitable IPOs beating unprofitable IPOs was also true in the 1980s and 1990s.”

Discussing this issue on the Sky News website, meanwhile, business presenter Ian King noted that more than 180 companies have floated during the first nine months of the year, raising more than $50bn (£38bn). That makes 2018 the biggest year for IPOs since 2014 – itself a year in which the figures were distorted by the arrival of Chinese e-commerce giant Alibaba, which raised a record-breaking $25bn.

Should you pay up for future hope?

Turning to the types of businesses that are floating while loss-making, the following chart shows that, as you might expect, technology and biotech companies are to the fore. Yet they are by no means the only ones, with well over half of all other IPOs currently featuring companies that are failing to make a profit – indeed, no fewer than a third of the entire Russell 2000 index of US companies made a loss last year.


With markets seemingly now as enthusiastic as they were in 2000 to pay up for future hope – just one letter away, of course, from ‘hype’ – it is worth recalling one further fact from the top of the dotcom boom. By the end of 2000, nearly three-quarters of companies coming to market that year had seen their share price fall since their IPO. Investors ignore Warren Buffett’s observation on prudence at their peril.


Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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