Stampede Of The Red Unicorns
There’s a thundering herd of new Unicorns (privately held tech companies worth $1B or more), who are poised to go public in 2019. On Friday Lyft was the first Uni to go live with its successful IPO. Other companies you may have heard of including Pinterest, Uber, and Slack are also slated to go public later this year.
But there’s an unusual commonality between these pre-public techs . . . none of them are making any money yet. As you can see in this first WSJ graphic, investors are lining up to pay hefty valuations for a piece of these companies even though they’re all losing money. As an example, Lyft IPOd at a $26.5B market valuation and the stock went up 9% during the first day of trading, even though the ridesharer lost almost $1B last year.
Going public while being in the red hasn’t always been a thing in tech. As you can see in this next graphic, more mature companies like Apple, Google, Facebook, and Cisco all started turning profits before their respective IPOs.
So why is Wall Street so eager to invest “Red Unicorns” now, despite the group’s lack of profitability? It all hinges on the belief that they’ll eventually achieve enough scale to disrupt and dominate their sector and become the next Amazon, Facebook, etc.. While that may happen for some of today’s Unicorns, it feels like a pretty risky play in the meantime.