Here’s an interesting thought. A wise investment is one that provides opportunity for future growth but also offers a clear path towards profitability. That seems logical but that perspective has been put to the test in 2019.
WeWork recently withdrew its application for an initial public offering after questions arose about its ability to be profitable in the long term. Other companies such as Uber, Lyft, and Peloton are new IPO offerings that face challenges as they attempt to grow towards a profitable business model.
We believe it is important to invest in assets whose long-term prospects appear promising given their business strategy as well as their pursuit of growing future markets. For that reason, a forward-looking perspective is needed when making investments to determine if an asset will be a reasonable investment long-term.
It is true that the current IPO class is moving towards market segments that will grow in the future. However, investors are increasingly requiring companies to have a path and plan towards profitability. The recent stock performance of these assets suggests that investors are losing patience. Even for companies such as Tesla, there does appear to be an appetite to understand the plan for long-term profitability.
A recent CNBC article highlighted why selling pressure might not be over for the 2019 IPO class. In that article they stated:
Lock-up periods are expiring for this year's IPO class, which analysts say could introduce a new layer of pressure for young companies.
Founders, employees and some early private investors who bought in before a company goes public are usually restricted from selling between 90 and 180 days. Uber, Pinterest, Slack and others are approaching that expiration date between mid-October and the end of the year.
A flood of selling could weigh on already struggling IPOs and dissuade other start-ups from entering public markets this year, according to analysts. It's also a reason some in Silicon Valley are lobbying for direct listings, which don't have the same selling restrictions.
Source: October 10, 2019, CNBC.com article by Kate Rooney
The struggling IPO class of 2019 could be facing another wave of selling soon
As we make investments in portfolios, we focus on future looking opportunities but also seek companies that have current profitability and a plan to continue to be profitable. This is not to say we would not invest in a more speculative asset, but the bar is high as we prudently invest assets.
I am often asked if we ever consider buying more growth-oriented positions and the answer is yes. But we also believe that it is important as a fiduciary to invest with discipline. While this may be a more conservative approach, we think it is the right one given today’s uncertain conditions.
If you have any questions about this information, please let me know. Always happy to help.