IPOs: Investors suddenly want real profits
The public markets have turned a cold shoulder toward flashy-but-flawed tech startups, said Eric Savitz in Barron’s. The fizzling of what was supposed to be a banner year for initial public offerings started with Uber and Lyft, whose stock prices have fallen 29 and 41 percent, respectively, since their IPOs this spring. Now there’s the colossal flop of office rental company WeWork, which pushed out its chief executive, Adam Neumann, and this week withdrew its IPO plans amid harsh investor skepticism. The public smackdowns of Peloton, an exercise bike company, and SmileDirectClub—once hyped as “the Warby Parker of braces”—upon their stock market debuts are further signs “that a correction has set in.” The chilly trend spooked Endeavor, the Hollywood entertainment company, which pulled its planned offering last week, and it’s an ominous sign for Airbnb, which aims to go public in 2020. Discerning public investors are finding that “not every company with an inspirational story is standing up to scrutiny,” said David Gelles in The New York Times. Neumann sold private investors on the idea that the unprofitable WeWork could “elevate the world’s consciousness.” Peloton similarly bills itself as “an innovation company transforming the lives of people around the world,” hoping that investors might “focus more on that mission statement, and less on the fact that it lost $196 million in the last full year.” They haven’t. While some companies that trumpeted their grand vision were embraced by the market—Google, Facebook—“they were also wildly profitable.”
Going public means companies have to report financial figures based on standard accounting rules, said Jean Eaglesham in The Wall Street Journal, instead of optimistic measures or outright lies. Back in 2010, one magazine reported that “just one month after launch, WeWork turned its first profit and has never stopped.” Not true. Peloton’s CEO, for instance, said in May 2018 that the company was profitable. The reality? Peloton “has been running at a loss since its 2012 formation” and expects the losses to keep coming for the foreseeable future. Equity investors, who are once more focusing on profitability ahead of growth, have grown wise to accounting tricks and are looking at “balance sheets and profits,” said Dion Rabouin in Axios.com. “As the U.S.-China trade war has intensified, triggering depressed economic data and heightened recession fears globally, investors have gotten more selective about what stocks they want to buy.”
Not every IPO this year has tanked, said Shira Ovide in Bloomberg.com. Less-buzzy software companies that sell to other businesses—think Zoom video conferencing and Slack office messaging—have actually fared pretty well. “It may be that the consumer-oriented tech companies with lots of attention as startups may be great companies but not necessarily great investments if the hype leads to overvaluation.” The discipline of the public markets should be welcomed, said the Financial Times in an editorial. It’s a sign “the IPO market is growing up.” In the recent past, steep losses “were a sign of ambition, scale, and speed of growth.” But greater scrutiny “exposed the weaknesses in the companies’ business models and, in the case of WeWork, the dangers of buying into the cult of a supercharged founder.”