TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
High valuation vs profit: Chicken-egg issue for unicorns
Change Size
The rapid rise and sudden collapse of a few tech companies has raised questions about the sanity of the stock market and investor valuation, which appeared to assign higher values to tech companies the more their losses mounted. (JP/Wendra Ajistyatama)
T
he rapid rise and sudden collapse of a few tech companies has raised questions about the sanity of the stock market and investor valuation, which appeared to assign higher values to tech companies the more their losses mounted.
Some of today’s most hyped companies are often not profitable businesses. Their bottom lines are less attractive. Many of these loss-making companies are sexy to investors and alluring to consumers as well. That is because these new breeds of companies discount heavily on the market price for consumer benefit.
The 2019 initial public offerings (IPOs) include few numbers of start-ups — Uber, Lyft and Pinterest — American tech unicorn companies that floated with multibillion-dollar valuations and all of them are booking significant losses. Uber, which is estimated to lose US$5.4 billion this year, went public in the United States a few months ago with a stock market valuation of around $80 billion. Lyft posted a net loss of almost $1 billion last year but, mid this year, pursued an IPO with a valuation of $24 billion.
Corporate finance researchers claimed that the trend was similar to the end of 90s, when there were many loss-making companies trying to enter the stock market. This was also the era when the dotcom boom exploded. In 2017, three out of every four companies going public in the US reported a loss before debuting on the stock market. Are we now close to a new dotcom boom bubble?
The record high for the global venture capital market was reached in 2018. We are in the era of loss-making companies raising capital in IPOs at the fastest pace since the dotcom bubble. The aforementioned unprofitable companies pursuing IPOs have already raised the most money of any year since 2000, according to Bloomberg.
The share price of Uber is now around 30 percent below the IPO price, and Lyft is down more than 40 percent from when it first floated to the market. The current situation is not as extreme as during the dotcom crash, but loss-making IPOs have surged since the financial crisis, with many outperforming the market in the short term.
Indonesian tech unicorns Gojek, Traveloka and Tokopedia are reportedly considering going for an IPO. These tech superstars have begun to move on from a cash burn strategy, discounted prices and heavy promotions. The debate comes as unicorns around the globe face greater scrutiny on profitability as they assess and weigh when to go public. Local and foreign investors have grown wary of tech firms going public and saw falling valuations after their IPOs.
