Stocktake: Beware the YUCs – young unprofitable companies

It is concerning that over 50% of private equity funding is going to unprofitable firms

Photograph: Getty Images

Photograph: Getty Images

 

YUCs – young unprofitable companies – could pose problems for markets. So says JP Morgan strategist Michael Cembelest in the bank’s 2020 outlook.

Technology initial public offerings (IPOs) in 2019 weren’t actually as bad as the media sometimes makes out, says Cembelest. “Most real technology IPOs are doing just fine”, with the strugglers tending to be companies that claimed to be technology firms “but which lack some of their critical attributes” (presumably a reference to companies like Uber, Lyft and WeWork).

Demand

That said, there is cause for concern. Firstly, more than 50 per cent of private equity funding is going to unprofitable companies – easily the highest level of the last 20 years.

Secondly, spending by YUCs accounted for up to 0.3 per cent of US GDP growth over the last two years and their demand for cloud services and online advertising accounted for 10 per cent of Amazon, Google and Facebook revenue. In other words, says Cembelest, if investors tire of financing the YUCs, the reverberations for the US economy and large tech service providers “could be substantial”.

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