By CCN.com: The stock market is in the silly season when IPOs of companies that have no history of profits are soaring. The last time the stock market saw this behavior was when the dot-com bubble burst in 2000.
Frothy IPOs aren’t the only reason for concern. The dot-com bubble stock market was the most expensive market in history. Today, the stock market is at its third most expensive valuation in history.
Why are frothy IPOs a sign of a market top?
As valuations get stretched in favorite existing names, investors look elsewhere for big returns in the stock market. All it takes is a single IPO to explode out of the gate, and that starts the media hype machine.
Institutions and hedge funds all want their quarterly numbers to look good, so they jump on the bandwagon; demand pushes these stocks higher.
The danger occurs when the IPOs that come to market are companies that not only are not making a profit but actually have massive losses from year-to-year. That is indicative of low-quality equity hitting the stock market. If investors are gambling their money on garbage, it means they can’t find anywhere better to put the money. Hence, we get a sign of a market top.
There have been no fewer than six IPOs in the past few weeks that are indicative of a major top, and two of them didn’t do very well when they began trading. Uber and Lyft hit the IPO market with a thud.
Uber had a billion dollar loss on the books, and investors realized neither it nor Lyft would make any money anytime soon. So those went nowhere. The point, however, is that they shouldn’t have even come to market given their huge losses.
Friday’s stock market IPO of Chewy , the online division of Petsmart, was priced at $22 per share; it opened near $36 and hit $40 at one point. Investors are treating Chewy’s stock as if it is the next Amazon, yet its last three years have shown net operating losses of $107 million, $338 million, and $268 million.
Beyond Meat continues to defy gravity. It is now trading at $154, several times its IPO price. Despite growing revenues fivefold to a mere $88 million between 2016 and 2018, operational losses have been consistently between $25 million and $28.5 million.
Crowdstrike, the cloud security firm, lost $136 million in 2018. Fiverr lost $36.5 million, almost doubling its 2017 loss.
Count on more money-losing companies to go public soon, and have your finger on the sell button. It’s a dangerous sign.