Luckin Coffee soared in its IPO, opening at $25 a share on the Nasdaq, even as many analysts questioned its profitability over the millions it has been spending to keep customers buying its drinks.
“There was this period where the market would accept companies that didn’t make money. Now they want to see a nickel of their return back,” Edward Jones Investment Strategist Nela Richardson said on Yahoo Finance’s The First Trade. “The tolerance is changing as we get later in the cycle.”
“They have to show that there is a path to profitability,” she said.
Michael Purves, chief global strategist at Weeden & Co., blames “momentum” for driving early valuations of some of the IPOs. Some investors are getting on board because of all the hype, not realizing that the fundamentals aren’t there or just hoping the company could be the next Amazon or Facebook.
“There’s an interesting blurriness” around big, game-changing companies, Purves said. For Uber, “the valuation got so high on the private rounds that, in a way, this unimpressive public market performance is a little bit of a hangover. The party was had, almost, in the private rounds.”
“Facebook, when it went public, had positive earnings growth,” he said. “Uber has really yet to do that.”
But that doesn’t mean investors should write off all of these IPOs. The tech space will always be hot as investors look for the next big thing, Richardson said: “If Lyft and Uber can show that they are part of this trifecta of what tech can offer, then maybe investors will give them a second chance.”