IPOs - No Earnings, No Problem

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Over 70% of companies doing IPOs in 2014-15 had no profits.

This was driven by the Biotech sector as the proportion of Biotech IPOs as a percentage of total IPOs reached all-time highs.

These trends reflect how frothy the biotech bubble got, and serve as a caution in that these type of excesses can take some time to unwind.

One of the many indicators we like to look at for building the market strategy picture for markets is IPO data. Trends in IPOs, while not only just plain interesting, can reveal insights about the mood of the markets and about the supply dynamics. In this article, we look at a unique annual IPO data set from Jay Ritter on the makeup of the US IPO market, and there are some ominous conclusions.

1. Proportion of IPOs with negative earnings

The first one is the proportion of IPOs with negative earnings. This chart is interesting as there is a sharp rise in the percentage of companies going to IPO with negative earnings in the last couple of years. Naturally, this type of chart would elicit fears that we could be in the middle of another dotcom-style bubble. It's important to note that though that the total volume of IPOs is far lower today (324 in 2014-15) than it was in the dotcom boom (858 in 1999-2000) - so it's not necessarily a sign that now is just like the dotcom bubble. But the other important point to note is the composition...

2. Proportion of IPOs by sectors

The composition of IPOs by sectors is also quite different; notably the dotcom boom was primarily technology companies. Meanwhile, the 2014-15 period saw a surge in Biotech IPOs (which understandably often go to market with little in the way of earnings as the capital raise is often an essential step for the company to commercialize and further R&D). It goes to show just how frothy the Biotech sector got - not quite dotcom territory, but many parallels. Given how dominant the biotech sector became in IPO land, it's tempting to call Biotech a bubble - which now seems to be in the process of bursting.


The surge in unprofitable IPOs serves as a warning sign - it brings up memories of the dotcom bubble. But while we can say it's not the same (lower absolute volume), the point of difference that matters most is the surge in Biotech IPOs. When you see a surge of any type of indicator for an individual sector, it should make you pause for thought. In this case, it goes to show just how frothy the Biotech sector got, and how the current slow unwinding of the Biotech bubble could have further to go.

Bottom Line: The surge in unprofitable IPOs came on lower volumes, but was driven primarily by the Biotech sector - highlighting the frothiness that had characterized that sector and its vulnerability to an unwinding of excesses.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.