Why You Should Steer Clear of the Wall Street IPOs for now

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Harry Potter, Pokémon, Star Wars — 1999 was a great time to be an eight-year-old. It was an era of change, both socially and technologically. The dawn of a new internet-driven age.

It was also a bloody busy year for Wall Street underwriters…

486 companies filed and listed in the US during 1999. A number that far exceeds the filings seen in more recent years.

This was the peak of an investing bonanza that was riding high on that internet future. Everyone and their dog were in the market, ready to reap the massive gains from an online boom.

Well, we all know how that ended.

When the dotcom bubble burst, it burst hard and fast. Stocks plunged, and a lot of recently listed internet businesses burnt a lot of investors.

Pets.com is the example I always love to bring up. Mainly because it was one of the few companies that actually had a good premise — they just failed to execute. In the end, they were far too ahead of their time.

Making purchases online may be commonplace today, but back then the infrastructure and trust just didn’t exist. People were sceptical of using the internet to handle financial transactions.

Unfortunate for Pets.com, a valuable lesson for everyone else.

But today, Wall Street is starting to look a hell of lot like 1999 again. We’re seeing massive IPOs, particularly in the tech sector. Companies that have great ideas and are household names, but they don’t make all that much money.

Last year for instance, 81% of the US companies that went public were unprofitable before listing. A stat that is reportedly dead even with the rate seen in the year 2000.

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Investors are caught up in the promise of future returns

By now you’ve no doubt heard about Uber’s plan for an IPO. It comes hot on the heels of main rival LYFT’s own listing late last month.

In just over three weeks, the ride sharing company has managed to wipe out 20% of its market value. A pretty disastrous start for a company that was hailed as a key part of the future of transportation.

As for the reason behind the decline, well the answer is obvious. LYFT is burning through a disgusting amount of money. In the fourth quarter of 2018 alone, they lost US$1.40 per ride. And there are no plans or signs of a positive turnaround anytime soon.

Investors are simply caught up in the promise of future returns. They know it’s a good idea, and they’re wishfully hoping that LYFT will one day turn it into a profitable idea.

Good luck to them, I say. While I certainly wish LYFT all the best, I wouldn’t be giving them any of my money right now.

Ahh, but what about Uber, I hear you say? Same story I’m afraid.

They might have more customers and operate across more of the globe, but just like LYFT, they make a loss.

In fact, last year Uber’s total loss was US$1.8 billion, which is slightly better than the US$2.2 billion from 2017. For reference (and because I thought it was ironic), LYFT made US$2.16 billion in revenue last year. Uber more than quintupled that with US$11.3 billion of their own.

But these giant revenue stats mean nothing when their costs and spending are so out of control. The fact is, something has got to give, otherwise these unicorns are going to crash and burn very fast.

This isn’t just a car thing either. Another tech darling, Pinterest, has also finally gone public as of last week as well. And analysts are still scratching their heads about how this social media site (just don’t call it that in front of their CEO) is going to become profitable.

It’s madness.

Doomed or determined?

On the face of it, all of these companies have set themselves up for a lot of pain if we see a market pinch. If things go south, just like they did in 2001, then expect to see more of the same from this new crop of loss-leaders.

Just like Pets.com, they could be destined to share the fate of the dodo. I genuinely hope they don’t, but they’ve got a lot of work ahead of them to turn things around.

The thing is though, they’ve all got great ideas behind them. Again, just like Pets.com, it’s not that their strategy is bad, it’s just that they need to find a better way to execute it.

Perhaps Uber and LYFT will never be profitable with human drivers behind the wheel. Once driverless cars roll around though, I suspect it will be a different story. Whether they survive to see it though is another matter entirely.

My point is, I think they’ve jumped the gun.

Going public in our current climate just reeks of a money grab. They’re stuffing their pockets while they can, hoping that hype and goodwill will keep them afloat until they can stop their ship from sinking.

As Robert Kiyosaki, the man who wrote Rich Dad, Poor Dad put it:

There are no bad business and investment opportunities, but there are bad entrepreneurs and investors.

If you don’t want to become one of the latter, I’d steer clear of the Wall Street IPOs for now.


Ryan Clarkson-Ledward,
For Money Morning

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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