This year has seen a boom in IPOs - but also a possible sign of bad times ahead
- So far, 2018 has been a good one for the initial public offering market.
- There have already been more IPOs than all of last year - both overall and in the tech sector.
- The market is really being driven by biotech firms; this year, such companies could comprise their highest portion of total IPOs ever.
- But there are signs that the IPO market is getting overdone - a higher portion of companies hitting the public markets are unprofitable than ever before.
Going into the year, Wall Street was expecting 2018 to be a good one for public offerings, particularly in the tech sector.
It hasn't disappointed.
Through three quarters of the year, there have already been more IPOs (both overall and in the tech sector) than in all of last year, according to new data from Jay Ritter, a finance professor at the University of Florida, who closely tracks the public offering market. And the amount raised in those offerings - both in tech and total - also already tops all of the proceeds from last year's IPOs.
In fact, Ritter noted, "more money has already been raised this year than any of the last three years."
Through September 30, 110 companies have gone public in the U.S., according to Ritter's data. Of those, 33 were tech startups.
Companies debuting on the public markets have raised about $30 billion overall thus far this year. Tech firms have garnered some $10 billion of that total. Among the tech companies that have hit market this year are Dropbox, DocuSign, and SurveyMonkey.
By contrast, 108 companies - including 30 in the tech sector - went public last year, according to Ritter's data. The companies that debuted in 2017 raised $24.5 billion, $7.8 billion of which went to tech firms.
Biotech and the bullish stock market are boosting IPOs
Two factors are helping drive the IPO boom this year, Ritter said. One is simply that the stock market is up. The S&P 500 has risen about 10% on the year, while the Nasdaq - the market of choice for many of the companies going IPO - has climbed about 17%.
The other reason is a significant uptick in the number of biotech offerings. The year has seen 47 IPOs from such companies, which is already tied for third most ever and is on pace to be the second most, according to Ritter's data, which includes records dating back to 1980.
Last year, 32 biotech companies debuted on the public markets. The year with the most biotech IPOs ever was 2014, when 74 went public.
Despite the resurgence this year, the tech IPO market doesn't look like it will see the number of new listings that some on Wall Street had been hoping for. Earlier this year, several tech bankers predicted that the market might see upwards of 50 tech IPOs in 2018. Right now, the market's on track for about 44.
Also, despite the upswing in new listings overall, the market is still far shy of where it was during the technology and dot-com boom of the 1990s. The number of companies that went public each year from 1991 through 2000 ranged from 281 to 677, according to Ritter's data. And between 1992 and 2000, the number of tech companies that went IPO ranged from 113 to 370.
What's more, in both 1999 and 2000, the total proceeds from all IPOs hit nearly $65 billion.
The significant drop in the IPO market since those days is largely due to startups being acquired rather than going public, Ritter's research has shown.
The lack of profits could be a bad sign
Although the numbers of new listings and the proceeds they're seeing are lower now than they were at the end of the dot-com boom, a similar dynamic is going on in terms of the operating performance of the companies going public, according to Ritter's data. There's been a sharp drop in the last several years in the proportion of companies going public that are profitable. In fact, if 2018 had ended after the third quarter, that proportion would have been the lowest on record.
Just 19 - or 17% - of the companies that have debuted this year were profitable. The year that currently holds the title for lowest percentage of companies that were profitable at the time of their IPO was 2000, when just 19% did.
Some 81% of tech companies that have hit the markets this year are posting red ink. But it's the biotech sector that's really weighing down the average. All 47 biotech companies that have hit the market are unprofitable.
Investors appetite for shares in such money-losing companies puts the lie to the notion that market is focused on short-term profits, Ritter said.
"The evidence is that investors are happy to finance unprofitable companies that have a good story," he said.
But the soaring proportion of unprofitable companies going public could be an indication that the boom - both in IPOs and the economy overall - is coming to an end. In each of the last three times the market saw a drop like this in the proportion of companies going IPO that were profitable, that decline was followed by a recession.