Here’s proof that for tech IPOs, profits don’t matter

Everyone’s freaking out about a tech bubble. Internet companies like Uber are accused of throwing business fundamentals out the window before they list on the stock market. That they ignore profitability, sustain massive losses, and focus aggressively on expansion.

After listing though – when the company’s financials are scrutinized by all and sundry – things crash down to earth.

Actually, that’s often not what happens, and I’ll tell you why in a second.

I was prompted to investigate further after I saw this tweetstorm from a venture capitalist:

$MSFT IPO in 1986. Profitable since 1982.$GOOG IPO in 2004. Profitable since 2001.$FB IPO in 2012. Profitable since 2009.

Trend anyone?

— Chamath Palihapitiya (@chamath) February 20, 2016

Sounds legit right? It follows the journalistic maxim that “three anecdotes make a trend.” But while the maxim is great for storytelling, it’s not great for finding truths.

So I did something about it. I compiled a list of 55 IPOs by internet companies that happened from 2010 to 2015 (dataset here).

I obtained their latest pre-IPO annual profit margins. I then calculated how much their average share prices over three time periods (years one, two, and three) differed from their closing prices on the first day of trading.

Next, I did two statistical analyses using the numbers:

Nope