Investors in denial still gambling on overvalued tech stocks

Maybe another dotcom bubble and rupture needed to illustrate the steep learning curve

Lyft is expected to go public with a $23bn valuation despite having never made a profit. Photograph: Angela Weiss/AFP

Lyft is expected to go public with a $23bn valuation despite having never made a profit. Photograph: Angela Weiss/AFP

 

Perhaps we need another dotcom bubble and subsequent burst. How else will investors learn that overvalued tech companies probably aren’t a great, or even a good, bet?

Ride-hailing app Lyft is soon to go public, with reports suggesting its initial public offering (IPO) could range from $62 to $68 per share. Such a range, and the fact that the IPO is oversubscribed, could mean the company would be valued at more than $23 billion.

Sure, Lyft provides a solid solution for an annoying problem but even if we ignore the fact it’s not the only company offering this service, the lofty valuation comes after it reported a $911 million loss in 2018, up on the $688 million loss for the previous year.

That widening loss is hardly cause for celebration, and Lyft hasn’t been clear on its road map to profitability. Where has Cantillon seen this before?

Most recently, it was when Snap – the company that owns Snapchat – went public in 2017. Before doing so, Snap reported a loss of $514 million in 2016. That increased to $3.4 billion in 2017, coming back to $1.2 billion last year. And it too was unclear on its path to profit when it tapped public markets.

Snap went public with a share price of $17. That price rose swiftly over two days to its record high of $27.09. Since then it has been on an almost constant decline, with its price now 37 per cent lower than at its flotation.

Had its investors put their cash into the stock exchange of Europe’s basket case, Greece, they’d by up more than 9 per cent by now.

But the writing was on the wall. Snap, to be fair, was up front about its limited immediate prospsects for profitability.

Compare that to Facebook. When it went public, it had a clear commercial road map into which investors could buy. That simply isn’t the case for some of the IPO class of 2019. Uber, for example, with a valuation of more than $120 billion, has never turned a profit. Nor has Slack, valued at more than $7 billion.

On reflection, maybe we’re already in the bubble.

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