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Jason Goepfert The truth about IPOs and profit

The proceeds raised from initial public offerings (IPOs) in 2020 broke records dating back decades. It was also close to record-breaking in terms of the number of offerings as well as first-day returns, and the number of newly issued stocks that doubled on the first day, research from Jay Ritter (Cordell Eminent Scholar at Warrington College of Business, University of Florida), shows. Only late 1999 through to early 2000 can compare on those metrics.

Many of these new stocks are making money for their investors, but the companies themselves are not. In 2020, there were more than 90 IPOs that showed a negative number on the net income line, more than in any other year except for 2000.

But that year also had many IPOs from companies that were making money at the time. In 2020, there were more than 10 unprofitable companies going public for every profitable one, far exceeding any year since at least 1990.

One reason why so many companies are going public without turning a profit is that they just haven’t had time to do so. The median age of a company going public in 2020 was barely five years old, the lowest in 30 years, thanks in large part to investors’ willingness to hand money to blank-cheque companies.

When risk appetite is high, equity investors are willing to accept ideas and concepts in lieu of revenues and profits. Not only were they willing to do that in 2020, but they also handsomely rewarded the companies once they had listed. The only year that can truly compare to this kind of behaviour is 2000, the peak of the tech bubble era.


This article was written by Jason Goepfert, who is a researcher, columnist and founder of Sundial Research and was previously operations manager at Deephaven Capital Management and Wells Fargo Investment. Through SentimenTrader.com Goepfert focuses on application of investment sentiment and breadth- and priced-based analysis.


This article was originally published in our Opto Magazine. You can purchase copies on our Opto Shop.

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