Unprofitable companies going public. Venture capital startup funding the highest since 2000. The return of the Nasdaq Composite Index to 5,000. Federal Reserve money printing funneling into the stock market.
These facts have led many to ask the question: have we returned to the era of the notorious dot-com bubbles? With the latest influx of data and reports, some economists are warning of another crash reminiscent of what happened 15 years ago, and this wouldn’t bode well for the United States and global economic recoveries.
In today’s market, where investors are trying to cash in on the next big mobile application or biotech pharmaceutical drug, a growing number of companies are going public before they even make a dime, and a wide spectrum of investors realize this.
Last year, 71 percent of IPO companies were unprofitable, up from 46 percent in 2012. Investor appetites for unprofitable IPOs hasn’t been this large since 2000, when 80 percent of IPO firms weren’t generating any profits. This has prompted many financial minds to raise the red flag.
It was also reported last month that startup funding from venture capitalists hit more than $47 billion. A figure that hasn’t been seen since the dot-com era, when investors invested just under $37 billion in startup firms. It should be noted that National Venture Capital Association and PricewaterhouseCoopers pegged this number at $48.3 billion.
Right now, there are roughly 50 VC-backed startups that are already valued at a minimum of $1 billion. Another number that is far higher than the dozen or so that traded at the peak of the dot-com boom.
Fifteen years ago, investors threw their money at any infant website that went public. This level of speculation, fueled by cheap money supplied by the U.S. central bank, created widespread havoc, and just a few years later the country experienced a housing crash, a subprime mortgage meltdown and a Great Recession.
Today, however, it isn’t just tech startups that are going public and raising an enormous sum of funds. The biotech industry is undergoing a tidal wave of momentum as they’re betting big on the future. In fact, just one-quarter of IPOs last year were tech firms, while a large portion of them were biotech.
Due to the low interest rate environment, biotech firms are taking on heavy debt levels and suffering short-term losses. However, because of the extensive regulatory scrutiny and failed pharmaceutical drugs, it’s a volatile bet for investors, and they could be burned, yet again, just like during the dot-com collapse.
Not everyone is relaxed about this substantial level of money being thrown around everywhere like a sack of potatoes. Bill Gurley, one of many venture capitalists behind Uber, warned late last year that the startup industry is taking on an immense level of risk.
The mainstream media is already peddling the notion that this time it will be different (we promise).
CNBC reports that the Nasdaq Composite Index will reach 5,000—a number unseen since Mar. 2000. "There is no doubt that technology stocks have come a long way in the past 15 years, and this time, really, it will be different," the business news outlet opined.
Marc Faber, publisher of the Gloom, Boom & Doom Report, stated last month that once the Nasdaq surpasses the 5,000 threshold then a collapse will likely unfold. Meanwhile, Peter S. Cohan, president of Peter S. Cohan & Associated, wrote in Entrepreneur magazine that a large portion of the VC money is going into late-stage investments.
Contrarian investors have averred for quite a while that quantitative easing, low interest rates and excessive money printing have contributed to a variety bubbles, including real estate, bonds, tech and credit markets. We could very well be on a dangerous path as big money is floating around Wall Street and dumped into companies that aren’t turning out a dime.
Despite the words of caution, investors are attempting to assuage the warnings by enhancing their appetites for more unprofitable IPOs.
Do you think that the world is heading for another meltdown? Your thoughts and comments below please...