Chartology: May 2019
In this month’s edition of “Chartology”, Director of Investment Research Chris Maxey discusses trends over time in Initial Public Offerings.
In this Chartology we want to discuss a trend that we’ve heard quite a bit from clients about and we’re reading more about in the financial media, and that is trends in initial public offerings. What you’re going to see on this visualization is the number of IPOs that have negative earnings at the point of going public. If we look at 1980, about one in every five companies was unprofitable when they decided to go public. A couple of interesting trends happened or evolved over the intervening decades. In 2000, four out of every five companies that came to market during the tech bubble were unprofitable. Not particularly surprising—particularly the benefit of hindsight.
Throughout the 2000s we see that an increasing number of companies, when they came to market, were in fact profitable, and that trend remained intact for a very long time. We’ve now come full circle however, and in 2018 we see again that four out of every five companies is unprofitable. Now, what does this mean? Does this suggest to us that the IPO market is frothy or somehow unsafe? Well, let’s take a look at some additional data.
On this slide we’re looking at the same line as before—percent of IPOs with negative earnings—but we also show the absolute number of companies that are going public. In 1996 there were 677 companies that went public. You can see throughout the late 1990s, there were a very large number of companies that were coming to market. Throughout the 2000s though, that dynamic changed and very few companies actually came public. Even in 2018, despite what seems like a very favorable market for most companies, we only saw 134 companies go public. That is a small number. So yes, there is less profitability as we see with that 81% number, but there are fewer companies in aggregate.
A secondary trend that’s going on is that companies tend to be older when they debut. In 1999 and in 2000 companies were about five years old, so relatively immature companies. Today in 2018 and 2019, the median age of those companies is about 10 to 11 years, so it has actually doubled since the late 90s. What this tells us is that companies are more mature when they come out. Yes, they may have less profitability, or at least they might be unprofitable in aggregate, but they tend to be more mature.
One last thing to note is that, just like all investing strategies, there is an attraction to IPOs. They’ve been garnering a lot of attention, and there’s been some particularly large names that have debuted in the last six to nine months. I would encourage people to remember that IPOs are not going to be the “get rich quick” mechanism that some perceive them as. In fact, looking at the data from 1980 through 2016, IPOs on average under-perform the market over the next three years. Yes, there are situations that buck that trend and would suggest that that’s not the case, but in aggregate based on the data, IPOs make less money than the broader market over the next three years. If you’d like to take a look at that data or have a deeper discussion around IPOs, please feel free to reach out to your advisor or visit our website at www.BELR.com. Thank you.