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.
