A raft of big tech IPOs have struggled recently, as investors apparently shun high priced, unprofitable companies. If you’d bought an equally weighted basket of Uber, Lyft, Spotify, and Peloton at IPO, you would’ve lost over 30% to date. And that’s before we even get to the kerfuffle of the failed WeWork IPO. Iain Fulton, Investment Director at Nikko Asset Management, believes the problem is a straightforward one.
“What we’ve seen over the last 10 years in the US IT sector is $1.4 trillion injected into the private equity market in tech companies alone. That’s the equivalent of the entire profit pool of the technology sector.”
It’s a story as old as markets themselves; large amounts of capital flow to sectors that are producing high returns, which pushes prices up, and therefore, future returns come down. Fulton expands on this story, and discusses what it would take for him to be attracted to these companies, in the video below.
The future return on investment and the growth of a company's cash flows are key focus points. Iain's team seek companies where the future is not reflected in today's valuations. To find out more click the contact button below.
The stocks mentioned in this wire are for
illustrative purposes only and are not a recommendation.
A canny Scotsman ! In short, steer clear of the unprofitable, over-priced, cash consuming IPOs and be sceptical of the hype.
Given Direct Listing of Spotify; believe its more appropriate to use the pre-listing price of $132, rather than $150-$162 Day 1 price in framing such calculations. If only, due to immaterial volume of shares that transact for Direct Listings at a Day 1 cohort price, along with variations around which quoted Day-1 price to use (Open, Close, High, VWAP, given there is no IPO price as such). To an AUD investor in Spotify, April 2018 to 3 October 2019, the $17 USD per share loss ($132 to $115), has been fully covered via ~ $18 effective forex gain (as AUD depreciation in that time just exceeds Spotify decline), i.e. no loss outcome to a Aussie Spotify investor. Given Spotify's last 18 months have been good, re: revenue growth, user growth, and the company now bordering on profitability, the zero Aussie TSR result is obviously disappointing (over 18 months), but for mine it is not a good example of the value-differential that does exist between private and public markets, best typified by recent true IPO examples (Uber, Lyft, Peloton), that each involved far more stock price pumping (and subsequent deflating). This post partly motivated by SPOT holding, and support for Euro-tech culture/philosophy.