Last week we showed the worrisome level of exuberance that IPOs were creating [3] in terms of price outperformance over the broad market. It turns out the similarities to the prior dot-com busts runs considerably deeper (and more worrisome). As the WSJ reports [4], 68% of U.S.-listed technology debuts this year, or 19 out of 28 deals, have been companies that lost money in the prior fiscal year or past 12 months. That is the highest percentage since 2007, and 2001 before that.
As we noted before - this is what everyone believes will happen... and that they will be the first out...
[5]
Via WSJ, [4]
No profits? No problem.
Investors are showing increasing hunger for initial public offerings of unprofitable technology companies and the potential for big gains that they bring.
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The excitement over companies' potential rather than their present results is the latest sign in the stock markets of a rising tolerance for risk. The U.S. IPO market, often seen as a gauge of risk appetite because the stocks don't have a track record, is on pace to produce the most deals since 2007
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The piqued interest in earlier-stage technology IPOs in particular has raised concerns that IPO investors are turning a blind eye to the possibility that business plans don't pan out.
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"IPOs can have a place in someone's portfolio if you're willing to be a trader," said Robert Pavlik , chief market strategist at Banyan Partners, an investment manager that advises on $4 billion in assets. "But if you want to be a long-term investor, don't treat the stock market as another kind of Las Vegas."
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Some investors "want a lottery ticket on a company disrupting a very, very large market,"
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Pets.com Inc., for example, went public with sales of just $5.8 million in the three quarters before its 2000 IPO. Pets.com's shares priced at $11 and were trading at less than $1 when the company closed later that year.
In contrast, Splunk Inc., a data-analysis software company, lost $11 million in the fiscal year before its IPO in April 2012, but had total revenues of $121 million. Its shares are up 248% since its debut.
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"You should be more wary of these IPOs. They say the scariest words in the market are 'this time is different,'" said Lance Roberts, chief strategist for STA Wealth Management