JP/Wendra Ajistyatama

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.

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.

Indonesia’s online shopping giant, Tokopedia, is considering a dual listing in Jakarta and an undecided location. It is aiming to reach a break-even point and targets having a positive bottom line by 2020–2021. Tokopedia’s 2019 gross market value is around $16 billion, tripling in value. Analysts are confident that Tokopedia is on the right path to profitability, and its strategy to go public in two locations will support its exponential growth and secure a larger investor pool.

In general, the government has encouraged tech firms to go for IPOs as this can strengthen the country’s digital economy and encourage other companies to go public. However, the underlying advice is to ensure a healthy business performance and a business model that is proven relentless in the stock market.

As long as tech companies remain private, they can stretch the definition of profitability, high growth and loss-making through endless tales to investors. Back in the day, you could not go public unless you were a profitable
company.

Are profits still a good thing? Surprisingly, the same question was raised and was on analysts’ list back in the 1990s. It was also the beginning of an era when loss-maker tech companies attracted high valuation and investment, and many of them failed in the tech rout of 2000. Fast forward to 2019, Google and Facebook are hugely profitable tech companies; in 2018, they posted a profit amount of $30.7 billion and $22.1 billion, respectively.

Amazon is the second-most valuable company by market cap, but it is also known for being light on profits. It went public in 1997 and was unprofitable until the end of 2001. The journey to profit has been rather slow; it hit the record-high profit of $3 billion in 2018. However, when comparing Amazon to America’s largest companies over the last 20 years, Amazon’s profit amount is tiny.

The second-most profound question is why shareholders back companies that lose money. Most of it comes down to the high growth of the tech scene. This phenomenon led to investors becoming more comfortable with companies that tend to be unprofitable. Investors and venture capitalists are putting their money on fast-growing companies to look for the next rising stars, in hopes for the next big return in a later process.

Choosing between growth and profitability has always been like the chicken and egg question for tech unicorns. The pattern now is that venture capitalists and start-up investors are leaning toward growth. The rationale behind it is because a few big companies now dominate the market share and seemingly believe in a “winner takes all” model. Apple, Google and Amazon alone made up 10 percent of total public earnings in the US in 2015, and only 30 businesses accounted for half of it.

However, the market is now starting to recognize that rapid growth without profit may not always be healthy. Take the chaos surrounding WeWork; its valuation was cut drastically from $47 billion to $4.9 billion last quarter. WeWork’s soaring losses and cash burn model were obvious major factors in the decisions. This is a sign where the market is looking for a profitable and real money-making business model.

Now there is more pressure for tech companies to prove their business can lead to sustainable revenue and profit growth.

With a looming risk of global recession and uncertain geopolitical situation, it is even more crucial for tech companies to establish a sustainable strategy by generating a healthy financial performance — including a positive bottom line and liquid cash flow.

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A recruitment and talent strategic consultant at a multinational recruitment consulting firm.
The views expressed are her own.

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