Covering the IPOs of technology startups typically involves writing about corporations that lose money.
Sure, there are exceptions. Blockbusters like Googlewhich was creating wealth from search ads long before the IPO. Or, more recently, corporations like Instacart Or Clavio which hit the public markets shortly after making a modest profit.
But in most cases, even the most priceless, once venture-backed tech corporations went public before they became profitable. While they eventually made money, it often took a while.
How long? We decided to explore this query with an eye toward gauging investors’ tolerance for waiting for a public company to generate net income. We focused on corporations that went public after 2000 and are now mega-cap stocks.
Here’s what we discovered.
Often you have to wait several years
Today’s high-performing corporations have taken some time to reach their current valuations, and investors often wait several years for them to become profitable.
One of the recent members of this profitable club is Uberwhich went public in 2018 and is expected to post its first annual net income in 2023. Meanwhile, shares of the ride-hailing and delivery giant performed well last 12 months, with the company’s market capitalization recently hitting about $150 billion.
Palo Alto Networkswith a market capitalization of about $115 billion, also took some time to become profitable. The security provider, which went public in 2012, posted its first annual profit in fiscal 2018.
E-commerce platform Internet shopwhose recent market capitalization was around $100 billion, also took some time. The Toronto-based company went public in 2015 and looks set to post its first profitable 12 months in 2020.
Meanwhile Palantir TechnologiesFounded in 2003, it took 20 years to turn its first annual profit in 2023. But it waited until 2020 to go public, so the most patient investors were those that backed it as a private company.
Exceptions may be made for exceptional corporations
Some ultra-highly valued corporations took an unusually long time to reach profitability as public corporations, benefiting from well-known brands, significant media buzz, and long-term shareholders who believed in the business model.
One of the famous examples is Teslawhich went public in 2010 and reported its first profit in 2020. Even before it announced the profit, Tesla had for years been the most valued global automaker by market capitalization, due to its image as a pioneer in mass-market electric vehicles.
Sale 1,this sixth most priceless public software company, is one other late bloomer for profitability. The company went public in 2004 and reported its first annual profit in the fiscal 12 months ending Jan. 31, 2017. But with billions in annual revenue before then, the CRM giant had no trouble convincing investors of its sales track record.
Growing revenues make losses much more bearable
It sounds a bit obvious, but investors are much more willing to tolerate net losses in corporations with high revenue growth. Shareholders can even tell the difference between a company that is hopelessly in the red and one that might probably become profitable but decides to invest in growth as an alternative.
Amazonwhich went public in 1997 and made its first annual profit in 2023, is a classic example of the latter. Founder Jeff Bezos was known for emphasizing growth over short-term profitability, betting that market share would go to an e-commerce player with free or low cost shipping and competitive pricing. He turned out to be right.
Among the currently unprofitable technology corporations, Snowflake stands out as one that was able to grow quickly, post big net losses, and maintain a high valuation for a while. But it wasn’t an entirely smooth ride. Shares fell last week, for example, after Snowflake reported higher revenue but a larger net lack of $318 million.
What Time to Profitability Means for Unicorns and Prosperity-Era IPOs
The query of years to profitability now seems relevant because of the huge backlog of tech unicorns that are still private. To successfully launch, those who aren’t yet profitable will likely need to persuade investors that they may be in a few years.
Annoyingly, it’s hard to tell what the private funds of unicorns are, on condition that they don’t have to publicly share their profits. Still, corporations that are solidly profitable often like to trumpet that fact. Since we see few unicorns bragging about their net income, it’s not unreasonable to assume that most are still in the red.