Are we headed for dotcom bubble 2.0?

Flotations of loss-making firms hit 2000
levels amid warning signs bubble could be about to burst

Reaction

According to analysis by the Warrington College of Business at
the University of Florida, 81% of the 134 firms listed publicly in
America in 2018 were loss-making businesses and almost a third were
tech stocks.

Harry Brennan in The Daily Telegraph writes that “the only time
the percentage of publicly launching companies that made no profits
at all was equally as high was in 2000, when 380 initial product
offerings (IPOs) were recorded – the height of the dotcom
bubble”.

At that time investors poured money into start-up internet
companies, betting on rapid growth and hopes of cashing in when
their shares went public.

“Most of the dot-coms which listed on stock exchanges had done
little more than consume vast amounts of investor cash and showed
little prospect of achieving a profit” writes John Colley, a
professor at Warwick Business School, on The Conversation.

“Traditional metrics of performance were overlooked and big
spending was seen as a sign of rapid progress”, he adds, and when
it turned out that many were failing to turn a profit, investment
subsequently dried up and businesses collapsed.

Fast forward nearly two decades and 2019 “has been hailed the
year of the tech ‘unicorn’ IPO,” says Brennan, “as private
technology businesses valued at more than $1bn look to make their
stock market debuts”.

Ride-hailing app Uber was one of the most high-profile, floating
for $82bn (£65bn) in April, but then announcing a $1bn
loss a month later.

Gregory Perdon, co-chief investment officer of private bank
Arbuthnot Latham, has seen worrying parallels between 2019 and 1999.

“In the late 1990s, taxi drivers in New York would tell me which
call options they were buying on which tech stocks – it was
euphoric back then. I don’t think we are at those levels just yet
but, equally, I don’t think we are a million miles away,” he
says.

In fact, says Matthew Vincent in the Financial Times, “some argue that the only real
difference is that the taxi drivers are now the investment, rather
than the investors”. 

He continues: “As in 1999, there are plenty of people
claiming ‘this time, it’s different’. Some point out that the high
level of loss-maker IPOs reflects the number of biotech companies
raising equity these days – which they must do to fund drug trials.
Others note that in recent years, several loss-makers have turned
into stock-market darlings”.

An oft-cited example is that of Facebook, which floated in 2012
at $38, falling to $20, before peaking last year at $210.

However, “for sceptics who feel they have seen this movie
before, the performance of Lyft in the early days of its quoted
life rings a few bells”, says Tom Stevenson in the Daily Telegraph.

Uber’s ride-hailing rival, Lyft, was priced at $72 a share when
it debuted in March, jumping to $87 on its first day before falling
back to around $63 today. “The pattern of initial pop followed by
quick and panicky reassessment is directionally similar to the
early trading seen in lastminute.com, the poster child of the
dotcom era,” says Stevenson.

Like two decades ago, “traditional metrics have been ignored and
user growth taken as a proxy for future profitability. But this
requires an enormous leap of faith” writes Professor Colley,
meaning “it’s only a matter of time before the app bubble
bursts”.