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ChartBrief #25 IPOs With Negative Earnings

October 17, 2016

One of the many indicators we like to look at for building the 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 lower frequency of data (which runs to 2015) from Jay Ritter on the makeup of the US IPO market, and there are some very interesting 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 notable rise in the percentage of companies going to IPO with negative earnings in the last couple of years.  It's important to note that the total volume of IPOs is far lower today (324 in 2014-15) than it was in the dot com boom (858 in 1999-2000).  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 dot com boom was primarily technology companies.  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).  But it does show just how frothy the Biotech sector got - not quite dot-com territory, but many parallels.

 

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.

 

 

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