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How Long Can IPO Euphoria Last? –


Initial public offerings, with the exception of Lyft (LYFT) , have made remarkable gains in the early days of public investment so far in 2019.

PagerDuty ( PD) , Pinterest ( PINS) , Zoom Video ( ZM) , Jumia Technologies ( JMIA)  , Levi Strauss ( LEVI) , Tradeweb Markets ( TW)  , and many more have all rocketed upwards after IPOs. Many of the aforementioned companies even managed to do so after setting their IPO price above initial estimates and surging 50% or more on the first day of trading.

While the adulation is piled onto executives at present, the implications are a bit worrying. First of all, almost none of the names above are profitable and are only engaging investors on a hope that the companies will make money some day.

“Zoom and the other big deal today [Thursday], Pinterest, are taking too much capital out of the market and into these two stocks,” Action Alerts PLUS portfolio manager Jim Cramer warned. “There’s just not enough money chasing hotness. It never ends well even as this could be considered day one of the irrational exuberance of this market.”

With the Nasdaq at all-time highs, it’s a bit reminiscent of 1999.

According to Zacks, 1998 brought 363 new companies to market. In 1999, that roared to an all-time record of 510 IPOs. While we’re not to that level, the amount of money being thrown around on blockbuster deals is comparable.

The percentage of loss-making companies listing shares for the first time has reached tech bubble proportions of about 80% of all IPOs. Bernstein:

— Tracy Alloway (@tracyalloway) April 18, 2019

From 1998 to the first quarter of 2000, the Nasdaq Composite marked a nearly 400% gain as everyone wanted to get in on new tech companies, regardless of valuations or earnings potential. By the close of 2002, the index was down nearly 80% from its highs. For investors piling in at the index’s peak, it would take 15 years simply to break even.

While I am far from awaiting the IPO apocalypse, the money chasing these new names is demonstrably irrational.

The most pressing issue stemming from this is the question of just how much more irrational optimism is out there for names like Uber, Slack, Palantir, and possibly Airbnb.

That may force many of these names to front load their listings to make sure they aren’t last to market when much of the money is dried up. They can’t all be winners in that situation. For longer-term investors, not all of them can make money. With valuations in the billions, that’s a lot of money to wipe off the table.

On the other side of this coin, it’s taking capital potentially away from existing tech names as investors chase unicorns. That’s not a good brew for investors in high-tech names who may have lost their shine amid the IPO excitement.

The bottom line is that the getting is good for just about any company heading to market now. But the lack of concern for net losses can’t last forever.


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