Technology initial public offerings (IPOs) are back.
On March 29, the No. 2 U.S. ride-sharing business, Lyft Inc. (Nasdaq: LYFT), went public.
Lyft’s IPO was massively oversubscribed, as investors clamored to take part in the largest tech IPO since Snap Inc.‘s (NYSE: SNAP) in 2017.
Today, Lyft’s stock is trading below its initial listing price. This raises the question: Is an unprofitable taxi firm worth $24 billion despite losing nearly $1 billion last year?
Certainly not by traditional standards. All the more so as Lyft’s path to profitability remains elusive as ever.
Yet, with the market sell-off of Q4 2018 now firmly in investors’ rearview mirrors – and despite Lyft’s lukewarm start in the public markets – there is a new appetite for risk in the air.
2019: The Year of the Tech Unicorn
“Unicorns” are the 341 or so startups whose valuations have hit at least $1 billion.
And 2019 is the year that many tech unicorns are set to list on stock exchanges.
Unicorns expected to launch IPOs this year include household names like ride-sharing app Uber and short-term-rental website Airbnb.
Other unicorns set to test the public market include picture-based smartphone app Pinterest, billionaire Peter Thiel’s data-mining giant Palantir and corporate chat service Slack.
Is Tech Partying Like It’s 1999?
At the height of the 1999 tech boom, 260 tech firms went public.
Many companies launched IPOs simply because they had “.com” in their names.
With a small army of Silicon Valley venture capitalists champing at the bit to profit from their investments over the past decade, 2019 may exceed that figure.
But before you get swept up in this year’s tech IPO frenzy, it’s worth reminding yourself how the last tech boom ended.
Yes, had you invested $100 in Amazon (Nasdaq: AMZN) in 1997, your stake would have been worth about $120,000 at the peak.
But you can pick winners like that only with the benefit of 20/20 hindsight. The reality is there were a lot more Pets.coms than Amazons.
Most retail investors came late to the party and lost billions. Even a blue chip stock like Cisco Systems (Nasdaq: CSCO) lost 86% of its value.
I believe 2019’s round of IPOs will ultimately be an even tougher place to make money…
And Amazon-type winners will be far less likely in today’s environment.
Today’s tech unicorns are much more mature when they list than the Pets.coms of the dot-com era.
That means that IPOs today are less risky. Airbnb is less likely to go bust than, say, an internet portal focused on Latin America.
But it also means that much of the upside potential of an investment in a small company is long gone.
Let’s run some numbers…
Assume Uber lists at a $120 billion valuation, as expected. This would instantly make it one of the 50 largest U.S. companies by market capitalization.
That means Uber would have to hit a market cap of $144 trillion by the year 2041 to replicate the returns of Amazon. (Global GDP today stands at around $88 trillion.)
The Smart Money Says…
Typically, companies sell shares in IPOs to raise capital to support their businesses.
But today, it’s more about founders, venture capitalists and employees looking to IPOs as a way to cash in their winning lottery tickets.
Carl Icahn dumped his 2.7% stake in Lyft before its public offering – having made 5.5X his money based on Lyft’s IPO price.
The buyer? The equally savvy George Soros.
Soros’ purchase doesn’t surprise me.
Icahn thinks more like a venture capitalist. Soros focuses on profiting from major macro trends driven by market psychology. So Soros is clearly betting that the tech boom is set to continue.
My own view?
But, like Soros, I appreciate the boom-and-bust cycle of financial markets. And as with any boom, I expect today’s nascent IPO boom will one day go bust.
So if you want to profit from the latest IPO cycle, understand you are playing a game of financial musical chairs.
Just make sure you find a chair before the music stops.