There is a herd of unicorns prancing through Wall Street and the bulk of money is chasing them. A “unicorn” refers to a startup, usually venture-backed, that achieves a private valuation in excess of $1 billion whether they are profitable or not when they become public. What once seemed impossible is commonplace today. The two king unicorns are Uber, the $1.8 billion money losing taxi company, which could go public next month with a value of $100 billion, and Lyft, who lost $911 million in 2018 and had a valuation of $20 billion upon their offering.

The estimate for upcoming offerings in 2019 is $80 billion which is double the yearly average since 1999. Historically peaks in IPOs have indicated the top of the stock market and a precursor to a recession. Both 1999 and 2007 were very strong year for IPOs leading to nasty bear markets thereafter.

The proportion of companies reporting losses before going public in the US is the highest since the dot com boom in 2000. Of the companies that went public in 2018, +80% of them were unprofitable. And of the 100+ companies to complete an IPO since 2010, 64% were unprofitable. As can be seen from the chart below, the Russell 2000 loss-making companies outperformed profitable ones by more than 600 basis points (bps) in the first half of 2018 and are doing so by more than 700 bps so far in 2019. The unprofitable companies in the Russell Microcap Index outperformed the profitable ones by 420 bps.

Back to the Future...1Q19 Performance Mirrored 1H18
Loss-Makers surged again in 1Q, with Biotech and Software leading the way

Loss-making companies in the Russell 2000 are Outperfoming in '19 as they did in 1H18

Source: Furey Research Partners and FactSet.

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