October 3, 2018

Unprofitable companies are IPO’ing like there’s no tomorrow

New research shows that a whopping 83% of IPOs in 2018 have been filed by unprofitable companies.

New research from University of Florida professor Jay Ritter shows that a whopping 83% of IPOs in 2018 have been filed by unprofitable companies. 

Why is this happening?

As TechCrunch puts it, we’re in a “growth over profit” market — one that values two metrics: growth, and the size of the market the company is entering.

Sound familiar? It’s the same logic investors got swept up in during the dot-com crash in the early 2000s — and that’s exactly when the previous record for the highest percentage of IPOs made up by unprofitable companies (81%) was set.

So far, the ‘ol “invest in companies in the red” strategy has paid off this year: On average, stocks of money-losing firms have gone up 36% from the IPO price, compared to a 32% increase for profitable companies.

Investing in unprofitable companies might occasionally work out in the short-term, but it’s not a great long play.

As Ritter notes, 3 years in, profitable companies outperform unprofitable companies by an average of 6% per year.

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