You are using an older browser version. Please use a supported version for the best MSN experience.

Red Ink Floods IPO Market

The Wall Street Journal. logo The Wall Street Journal. 10/1/2018

Stock investors are welcoming money-losing companies into the public markets with open arms.

More than 80% of U.S.-listed initial public offerings in this year’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.

Investors’ tolerance for red ink has been rewarded, with stocks of money-losing companies listing in the U.S. this year soaring 36% on average from their IPO price through Thursday. That is better than the 32% return for IPO stocks with earnings and a 9% gain for the S&P 500.

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.

On Wednesday, online-survey provider SurveyMonkey’s parent SVMK Inc., which hasn’t yet had a profitable year and posted a $24 million net loss in 2017, jumped more than 40% in its debut after pricing above its targeted range. Shares of Tilray Inc., an unprofitable Canadian cannabis retailer that is one of the few pot companies listed in the U.S., have soared more than 740% since their Nasdaq debut this summer. Meanwhile, biotechnology companySolid Biosciences Inc., which had not yet generated revenue—let alone earnings—informed the market ahead of its January IPO that one of its clinical trials was put on hold. Investors ignored that potential red flag and the company raised $144 million. Its stock has nearly tripled.

Helping explain investors’ hearty appetite is that, even with the uptick in IPO volume, the number of public companies has been in historic decline and many of the hottest startups of recent years, such as Uber Technologies Inc. and Airbnb Inc., are staying private longer. As a result, there has been a feeding frenzy around companies that do go public, as many of them have outsize growth prospects.

Get news and analysis on politics, policy, national security and more, delivered right to your inbox

The prior high-water mark was 2000, when 81% of companies going public were unprofitable, compared with 83% so far this year, according to Mr. Ritter’s data. Unlike then, it is more than just money-losing technology companies getting a warm welcome today. A surge in biotech offerings has pushed up the current tally of newly traded companies without earnings.

Some analysts and investors worry that hopes for future profits for the current class of IPOs won’t be realized and say they detect echoes of the dot-com bubble. 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. (It excludes companies that don’t list on major exchanges, real-estate investment trusts, and blank-check companies, which typically use the money raised in an offering to acquire assets).

Many of the companies with negative earnings that listed shares during that time, such as Internet-services provider Genuity Inc. and Viasystems Group Inc., a maker of circuit boards, didn’t live up to their promise; both companies filed for bankruptcy protection in 2002.

Kevin Landis, chief investment officer of technology-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.

Mr. Landis said some companies may be more eager to go public without earnings rather than wait until they have small profits—and a lopsided price-to-earnings ratio, something he refers to as the valley of death.

Not all IPO stocks have fared well lately. ADT Inc., which priced $4 below the middle of its initial target range in January, fell 12% in its first day of trading and now the security company’s shares are down more than 30%. Among big money-losing companies to go public in recent years is Snap Inc. The Snapchat parent’s stock, which made its debut early last year, is down by roughly half from its IPO price as growth has disappointed and it suffered an exodus of key executives.

“The problem with young growth companies where investors have built in really optimistic assumptions is if the company doesn’t deliver, it can get revalued in a heartbeat,” said Mr. Ritter.

For now, fear of missing out on the rally is trumping such concerns, as major stock indexes trade near records.

Zander Lurie, chief executive of SurveyMonkey’s parent, said investors were likely willing to overlook the company’s net losses because it has strong cash flow. Profitability for the 19-year-old company is still likely several years away, he said in an interview.

Related video: How we got the longest bull market in history


Write to Corrie Driebusch at and Maureen Farrell at


More from The Wall Street Journal

The Wall Street Journal.
The Wall Street Journal.
image beaconimage beaconimage beacon