It’s spring, and the IPOs are blooming.
After a bitter winter, when plunging stock prices and a long government shutdown froze the market for initial public offerings, venture capitalists and Wall Street bankers are preparing to sell pieces of the biggest, hottest private companies to institutions and individual investors.
According to the Financial Times, more than 300 companies are ready to go public and want to raise as much as $50 billion. They include famous “unicorns” (private companies valued at over $1 billion) as No. 2 ride-sharing company Lyft, which should begin trading this week; its Goliath competitor Uber; rental marketplace Airbnb; image-sharing social media company Pinterest; office-sharing company WeWork, and data analytics firm Palantir Technologies.
This new IPO boom comes a decade into a bull market and after a big rebound in both the Dow Jones Industrial Average DJIA, -0.13% and the S&P 500 SPX, -0.46% from their December 24, 2018 lows to within 5% of their all-time highs. Some recent reports on housing sales and prices and consumer confidence, together with plunging bond yields, warn of a weaker economy ahead.
So, the timing looks right for VCs, many of which have owned stakes of these private firms for years, to finally cash out. Big pension plans and mutual fund companies also may want to grab a piece of the action to show their investors how cool they are.
But for individual investors who may be tempted by these shiny objects in hopes they’ll be the next Amazon.com AMZN, -1.01% or Alphabet GOOG, -0.98% , I have one word of advice: Don’t. Most of these new companies are bleeding red ink by the billions. It will take years for them to get into the black — if they ever become profitable at all.
Lyft, which will likely price above the indicated $62-68 range when it begins trading, lost $911.3 million in 2018 on revenues of $2.2 billion, according to documents filed with the Securities and Exchange Commission, and losses have been growing. Last year the much-bigger Uber had revenues of $11.3 billion and what the company called “adjusted” losses of $1.8 billion. Uber “continues to report heavy losses and slowing growth,” CNBC reported.
Pinterest had $755.9 million in revenue last year and only $39 million in net losses — which looks like a profit compared with the ride-sharing unicorns. WeWork, which Alex Wilhelm of Crunchbase memorably describes as “a vehicle that converts hard currency into negative net worth,” reportedly lost $497 million in last year’s third quarter on revenue of $482 million. WeWork, as Wilhelm put it, “is still losing money at a pace greater than 100 percent of its revenue,” and may be losing $2 billion a year. Who’s ready to step up and buy this stock?
Palantir, the secretive firm co-founded by Peter Thiel, may have reached the $1 billion mark in revenues last year, but it’s still reportedly losing money as valuations for a possible IPO range from $10 billion to $40 billion. Only Airbnb appears to be making a small profit.
While we’re on the subject of valuation, you can’t value these money pits — sorry, companies — at multiples of earnings, because there ain’t any. Even their price-to-sales ratios are as rich as Black Forest cake. At a $25-billion market capitalization, Lyft would trade at 12x revenues, much higher than Facebook’s FB, -1.08% current nine times sales, but Facebook, for all its problems, reported net income of $22 billion last year.
At its last venture financing in 2018, Uber was valued at $62 billion, but following a successful Lyft IPO, that could go as high as $70-$80 billion, about six- to seven times last year’s sales. Pinterest would also come public at Lyft’s 12 times sales and WeWork at a $40-$45 billion IPO market value would change hands at 16-20 times revenue, as would Palantir, if recent valuations hold.
These companies have had multiple funding rounds (Uber’s first full venture funding came in 2011). Since VCs usually don’t stick around more than eight to 10 years, they’re hungrily eyeing the exits. Wall Street, too, which saw bonuses drop by 17% last year, is licking its chops for windfall investment banking fees. For these people, it seems like the perfect time to take the money and run like thieves.
Today’s IPO companies seem to be competing to see how much money they can lose.
But it’s a different story for individual investors. For years, scribes and pundits have compared hot IPOs to the dot-com crash of 2000 even though most of the companies that went public recently were making money. But now we’re getting a whiff of the halcyon days of Kozmo and pets.com, as today’s IPO companies seem to be competing to see how much money they can lose.
Too many individual investors— I’m talking to you, millennials — invest in fads, like crypto or cannabis, or companies they think they know. And it usually ends in tears: just ask people who bought into Snap SNAP, -1.12% or Twitter TWTR, -2.36% . Before you put a dime in any of these new unicorn IPOs, their CEOs need to explain how they plan to turn red ink into black, and when.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.
Why you should let the Lyft IPO go by, and grab it when it comes around again
