2019... Year of the IPO

Chris June |

You may have heard about the recent flood of stock initial public offerings (IPOs), which is the first time that the average investor can invest in a company. For example, 2019 has already seen the IPO of the ride hailing company Lyft, the online scrapbook company Pinterest, and the plant-based alternative meat company Beyond Meat. There are an additional 15 companies set to go public in just the next 8 days. There is also the long-awaited offering from Uber, the ride hailing and food delivery company, later this year. If these technology IPOs give you flashbacks to the Internet boom of the late 90s, then the coming IPO of Chewy.com may give you déjà vu to one of the most famous internet failures of that time, Pets.com. Pets.com is now a symbol of the overvalued, overhyped, money-losing companies of the previous Internet boom…and most of us remember how this ended… big losses.  Investors can have a short memory and risk-taking is back on Wall Street with around 80% of the recent technology IPOs showing negative earnings. This compares to the 1980s when only around 10% of tech IPOs were from companies with negative earnings. This is shown on this chart:

 

Image result for jay ritter charts

 

You can view this information in more depth here: https://www.morningstar.com/news/dow-jones/technology/TDJNDN_20190427134/cutting-tech-stocks-some-slack-wsj.html

At SFM, we don’t give investment advice over the Internet and social media. Everyone’s risk tolerance and goals are different.  However, I think investors should be very cautious when considering to purchase any IPO, especially from money losing companies that may be years from earning a profit; or worse, as Uber warns in the risk section of their prospectus that they may NEVER earn a profit. What is the appropriate price to pay today for a company that never earns a profit? You don’t have to search that long for some recent examples of a company’s profits and stock performance not matching the hype around its IPO. As of 5/1/19 Snapchat stock price is down -55% since its closing price on the day of its IPO in 2017, Blue Apron stock is down -90% since its IPO in 2017, Fitbit stock is down -83% since its IPO in 2015, and GoPro stock is down -82% since its IPO in 2014.  Consider, for example, that Snapchat generated sales of +$1.27 billion in the last year. However, after deducting the cost of running their business, they reported a giant loss of -$1.18 Billion in the same time period. All four of these are companies that customers universally love, but many have not found a way to leverage that into a successful business model or a profit generating firm.

Remember to keep the risk of the downside in mind whenever you consider making an investment or any other major financial decision. Look down at a new investment to see where it could fall before you look up to see how high it can go.  Contact Chris at
cjune@sfmllc.net if you would like our opinion on  IPOs or other investments. We can also help you if your 401(k) and other investment accounts have you nervous about being able to afford retirement.

 

Disclosure: Nothing in this article or on this website should ever be considered to be advice or an invitation or recommendation to buy or sell any securities/investments.  Seek the advice of your own qualified financial advisor before you commit funds to a new investment or financial product.