Despite all the buzz, fresh tech stocks like Uber [UBER] and Lyft [LYFT] have been under intense investor scrutiny, as Lyft tumbles from its multi-billion-dollar valuation, performing worse than major indexes and trailing the broader sector.
Both ride-sharing companies are unprofitable and have seen $6.4bn and $5.27m, respectively, erased from their valuations since their market debuts, with shares down about 2.2% and 27% overall as of Monday’s open.
Indeed, both stocks are volatile due to their inability to convince investors of their paths to profitability. What metrics can traders look out for when weighing up a stock amid such an increasing amount of cash-burning companies looking to go public?
Funding Circle’s flotation flop
Funding Circle [FCH] – an online lending platform that enables individuals and companies to lend to small businesses – is the latest example of a hyped IPO from a business yet to turn a profit. A few lacklustre earnings announcements later, it appears the stock was indeed overvalued.
Most recently, on 2 July, the UK-based company slashed its revenue growth forecast for 2019 from 40% to 20% citing a slowdown in demand from economic uncertainty caused by Brexit. The news sent its shares down 29% to 115.6p.
For Colin Jackson, an analyst at stockbroking firm Goodbody, the revenue downgrade was “disappointing” but “not entirely surprising in our view, as the ambitious growth targets set out at the initial public offering were always going to be difficult to hit while also maintaining a firm grip on asset quality”, he told The Guardian.
Up to Monday’s close, Funding Circle’s stock has fallen a massive 72.5% since it went public on the London Stock Exchange on 2 October 2018, with its share price slumping down to 121p.
|Quarterly Revenue Growth (YoY)||47.20%|
Funding Circle share price vitals, Yahoo Finance, 17 July 2019
As in increasing number of tech unicorns prepare to float, can Funding Circle’s performance lend itself as an example for what investors should look out for in an overvalued startup?
Keys to success: roadmaps, appraisals and diversification
As it stands, more than $16bn has been raised by VC-backed companies via IPOs this year. And with big names such as Airbnb and WeWork rumoured to be going public imminently, the total raised via market flotations could push the total past 2012's record of roughly $21.2bn, according to data from Pitchbook.
Amount raised by VC-backed companies via IPOs this year
Amid the IPO flurry, analysts have identified three things investors should look out for to avoid putting money into a company that later struggles to perform: a granular roadmap outlining how the company plans to achieve profitability, a transparent pricing valuation and a diverse set of revenue streams.
While Funding Circle had been pitched as a fast-growth business at its IPO, it has struggled to meet the ambitious growth targets it forecast for itself.
For Russ Mould, investment director at AJ Bell, failing to deliver on promises is “one of the worst crimes a company can commit” because of the effect it has on credibility. As a result, he believes it may take Funding Circle some time to regain trust from investors.
“Going too fast presents significant execution risks and scope for major disappointments. Funding Circle should have learned its lesson by now, given how it hasn’t been awash with good news since being a listed company,” Mould told City AM.
“Going too fast presents significant execution risks and scope for major disappointments. Funding Circle should have learned its lesson by now, given how it hasn’t been awash with good news since being a listed company” - investment director at AJ Bell, Russ Mould
For traders looking to invest in this year’s IPOs, Mark Hargreaves, head of global equities at Axa Framlington, says investors need to be patient.
“While being an early investor can offer some initial or short-term upside, not all opportunities will be profitable,” he told MorningStar. “By waiting to see how well a company can translate innovation into a commercially viable business model and ultimately into profits, you can potentially separate the winners from the losers in any given area.”