The number of unprofitable companies going public has hit tech bubble levels, BAML says

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• The number of unprofitable companies going public has surged to “tech bubble levels,” according to Bank of America Merrill Lynch.
• The firm’s strategists say the percentage of companies going public that have yet to generate positive earnings has reached 70%.
• Over the last several months, investors have begun to shy away from investing in companies with uncertain paths to profitability, such as Uber and Lyft. 
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The number of unprofitable initial public offerings has swelled to “tech bubble levels,” according to a new report from Bank of America Merrill Lynch. 

According to the firm’s analysis, the proportion of unprofitable companies going public has reached 70%, the highest since the peak of tech-industry exceess roughly 20 years ago. This dynamic is shown in the chart below on both an earnings and EBITDA basis.

BAML

Investors have poured money into unprofitable companies in recent years amid low interest rates and slow growth, according to BAML. But now the sentiment toward cash-burning companies appears to be changing as 2019’s once-booming initial public offering market begins to sputter. 

“Recent IPO withdrawals could be a warning sign that investors are shifting focus to profitability amid macro concerns,” BAML strategists said in note to clients on Monday. 

The firm continued: “The potential ripple effect could be significant — tech innovation has been one of the biggest deflationary factors and if companies start focusing more on profitability via pricing, we could start to see an upward pressure in inflation.”

Several of this year’s largest IPOs — including ride-hailing rivals Uber and Lyft — have fallen below their offering prices as investors turn away from business models with unproven paths to profitability. 

The IPO market also took a major hit when coworking giant WeWork pulled its highly-anticipated IPO following the resignation of cofounder and CEO Adam Neumann. 

Read more: The ‘worst of all possible worlds’: One renowned stock bear is crying foul on an increasingly vulnerable part of the market — and reiterating his call for a 65% crash