The Latest Batch of 'Hot' IPOs is Bleeding Red Ink Like Mad; Stay Away!
There’s no substitute for experience in this business. The longer you spend watching Wall Street, the more you see. And the more you see, the better you understand how the business works.
That brings me to today’s Initial Public Offering (IPO) mania, one that’s particularly focused on freshly minted tech and biotech stocks. I have both personal and professional experience with manias like this one — because I’ve been analyzing the financials of these offerings recently and because I worked at a dot-com company in the late 1990s.
Frankly, I’m appalled at the kinds of stocks coming out of the IPO chute lately. And I have every reason to believe this IPO boom is going to end in tears.
Why? Well, I recently told the tale of one so-called “hot IPO”: iQIYI (IQ). The Chinese video-streaming service just raised $2.25 billion via a U.S. listing. Yet it has been bleeding red ink like mad, losing money throughout its eight-year existence.
That includes $554 million in 2017, $463 million in 2016 and $410 million in 2015. And if recent analyst projections are correct, it’ll lose ANOTHER $789 million this year and $723 million in 2019! Who in their right mind would want to own this kind of dreck?
But IQ is far from the only money-torching IPO that speculators have gone gaga over. A whopping 120 companies managed to raise just over $35 billion on U.S. stock exchanges through the first half of the year. That puts 2018 on track to be the second-busiest IPO year (besides 2012) since … drumroll please … the 2000 peak of the dot-com bubble!
The problem is that we’re not talking about companies with long histories of profitable operations and time-tested business models. We’re talking about companies that are losing money hand over fist!
Consider this: Thirty-seven IPOs priced in June, according to Edgar Online data. Seven of those were specialized entities called Special Purpose Acquisition Companies (SPACs) or Blank Check Companies, rather than traditional firms. One was a gold ETF, and three others didn’t have full-year, comparable financial data available.
But among the remaining 26 IPOs …
• Only FOUR actually managed to generate an operating profit in 2017. That means 85% of June’s IPO companies are bleeding red ink.
• If you add up all the losses generated by the money-losers in 2017 … then net it out against the profits generated by the handful of winners … you get a whopping $754 million in overall losses. Three-quarters of a billion bucks!
• The abhorrent results didn’t just stem from a bad year for one or two firms, either. Every single one of 2017’s losers that provided data for 2016 also lost money that year!
Among the latest IPO crop are many smaller, unproven tech and biotech companies like HyreCar (HYRE). Its business model revolves around connecting wannabe Uber and Lyft drivers with people who have idle cars they don’t mind renting out to them. The firm managed to raise $12.6 million last month despite the fact it sported operating losses of $800,000 in 2016 and $4.1 million in 2017.
One of the biggest “winners” in the “Who can lose the most money and still go public?” race was DOMO Inc. (DOMO). The cloud computing company raised $193 million in June … despite losing $176 million in fiscal 2018 and $183 million in 2017.
Then there’s the Chinese “used car e-commerce platform” Uxin (UXIN). It hauled in $225 million from its IPO, money it could probably use. That’s because it generated the biggest operating losses of all — $270 million in 2017 and $188.5 million in 2016!
Now there are a HANDFUL of examples of past tech IPO companies that racked up sizable losses, yet eventually managed to prosper. Amazon.com (AMZN) comes to mind. But for every Amazon that survived and ultimately thrived, there were scores of money-losing “Me Too” jokers that collapsed and were never heard from again!
One study from the early 2000s found that more than half of the dot-com darlings of the late 1990s failed. A separate tally by Webmergers.com concluded more than 4,850 Internet companies either went broke or sold to larger firms between 2000 and 2003. And as you may recall, even analysts at the Wall Street firms that handled their IPOs, or that rated them positively in public, privately described some of them as “pieces of s***.”
Will many of the latest “red hot” IPOs suffer the same fate? Only time will tell. But it’s worth noting that some of them are already tanking hard! HYRE hit a post-IPO high of around $6.50. It just sank as low as $4.15 on Tuesday. That’s a 36% wipeout! DOMO dropped to the mid-$19s from almost $29, while UXIN fell to $7-and-change from $10.50.
My recommendation: Do NOT get sucked in by breathless IPO-related hype! When Wall Street is peddling this kind of sludge, your best bet is to run away as fast as you can. Sell all of the stocks I just mentioned, avoid other IPOs that don’t have a history of actual profits, and focus instead on higher-yielding, higher-rated, higher-quality companies like those I recommend in my Weiss’ Ratings Safe Money Report!
Until next time,
Mike Larson
