The IPO Market
Both Uber and Lyft came to market in the last two weeks as they attempt to raise funds to continue their efforts to become leaders in autonomous transportation. Both IPOs were met with disdain by investors with each company's stock price falling well below its IPO price. The fall in the prices of these two stocks reflects concern from investors that neither company has a clear vision on how they ultimately will make a profit. CNN briefly encapsulated the concerns in a recent article.
Uber was already the biggest high-profile IPO bust in recent memory. And it only got worse on Monday. Shares of Uber (UBER) fell nearly 11% for the day following a dismal debut Friday. The stock is now down about 17% from its initial public offering price of $45. Uber is facing a lot of skepticism about its ability to make money anytime soon as it battles with rival Lyft (LYFT) for market share in the US.
Source: May 13, 2019 CNN article by Paul R. La Monica
Investors are often willing to invest money based on the hope that one day a company will be profitable. Still, there does seem to be a lessening appetite for this type of risk. It appears as if investors are actually insisting a company earn a profit in a reasonable amount of time before they are willing to bid up the price of the stock.
Remember that IPOs are essentially an exercise in faith. Often IPOs do not have any discernible profit or short-term plans to make money. Therefore, one needs to trust the vision of a particular company as well as the long-term outlook for the sector that they are competing in. Faith can be rewarded as highlighted by companies like Amazon and Netflix. But reflecting back to the internet bubble of year 2000, blind faith in the business prospects for money-losing companies can sometimes be dangerous.
IPOs are investments that by default tend to be relatively speculative and, for that reason, investors with a strong appetite for risk are the most likely candidates to purchase these positions. As I said on KCBS on the day Uber went IPO into the market, one needs to carefully consider the risk associated with buying this type of asset and if it fits one's long-term investment strategy.
As fiduciaries, we carefully consider investments that we place in portfolios. The ability of a company to make a profit near term matters greatly to us. We certainly do conduct research in order to determine what trends we believe will likely be emerging in the near future; that’s important to us. We do tend to like companies that are involved in market segments that we believe have the potential for significant growth. Still, we are very hesitant to speculate on assets that “might” be profitable rather that “will” be profitable.
We believe that companies that make money (in segments of the market that are growing) give us the best long-term chance of success. We have not varied from this philosophy, and despite temptations to vary from that perspective, we intend on staying consistently focused on this investment principle. We believe it provides those we work with the best opportunity for success.
If you have any questions, please let us know. Always happy to help.