IPO Market: Money-losing companies are going public at a record rate as investors hunger for new issues. About 83% of U.S.-listed initial public offerings in 2018’s first three quarters involve companies that lost money in the 12 months leading up to their debut, according to data compiled by University of Florida finance professor Jay Ritter. That is the highest proportion on record, according to Mr. Ritter, an IPO expert whose data goes back to 1980.
Some analysts and market watchers are concerned. They see similarities with the dot-com bubble of nearly two decades ago that left many investors with enormous losses. The prior high-water mark for money-losing companies going public was 2000, when 81% of stock-market debutantes were unprofitable, according to Mr. Ritter’s data. Kevin Landis, chief investment officer of tech-focused Firsthand Capital Management, said he is wary of money rushing into unprofitable companies. “The lesson from 2000 is don’t chase what everyone else is chasing,” he said.
There are differences from back then. By one measure, the current class of technology IPOs is in a bit better shape than that of the dot-com era: In 2000, just 14% of tech companies listing shares in the U.S. were profitable, compared with 19% so far this year, according to Mr. Ritter’s data. And the warm welcome today is being extended to more than just money-losing internet and tech companies. A surge in biotech offerings has pushed up the current tally of newly traded companies without earnings.
Investors’ tolerance for red ink has been rewarded so far in 2018. Stocks of money-losing companies listing in the U.S. soared 36% on average from their IPO price through Thursday. That is better than the 32% return for IPO stocks with earnings and the 9% gain for the S&P 500 index.
The euphoria has powered a surge in new listings. More than 180 companies raised over $50 billion in IPOs in the U.S. in the first three quarters, putting 2018 on track to be the busiest year for new issuance by both measures since 2014, according to Dealogic. That year, IPOs jumped thanks in part to Alibaba Group Holding Ltd.’s $25 billion offering as well as a surge in biotech companies going public.