Big Idea - But When Will It Generate Earnings?

 "New research shows that over the last five decades, the percentage of US firms trading publicly with zero earnings has more than tripled to more than half of the total market." - Bloomberg, June 4, 2022

The actual percentage of those kinds of non-earners is 62%. That's versus 18% in 1970. The research on that had been produced at the University of Minnesota's Carlson School of Management. Published on March 24, 2022, in SSRN, it's titled "The Rise of (Mega Firms with Negative Net Earnings." Heading the research was Dan Su. 

Essentially what drives this phenomenon - or drove it since investors now are more demanding of real earnings - is a futuristic mindset. Instead of the pragmatic focus on when there will be real earnings there is the hope that the intangible asset such as Uber's idea for ride-hailing services will pay off big at a later date. The dream is that the cool idea will evolve into the Next Amazon or the Next Alphabet.

The explosive growth of public companies without earnings happened primarily because of easy money. Although there were some blips, economic times were essentially good. Currently, times are scary. 

The total collapse of Theranos (depicted in the docu-drama "The Dropout") and the near-bankruptcy of WeWork (chronicled in the documentary "WeWork") also are making investors less likely to be sucked in by:

• Founders' Charisma
• Vision of changing the world 
• New Age rhetoric
• Rapid growth, without creating a profit.

Overall, there will be a shift back to business fundamentals.

No, it's not unthinkable that ESG could take it on the chin. There could be an embrace once again of the Milton Friedman Doctrine that a public company exists to max returns to shareholders.  That is defined as the business' corporate responsibility. The push for that will probably be correlated with how much of a downward trajectory there is in the stock market.

But the part of ESG that will likely not only hold up but grow is Governance. Both Theranos and WeWork had passive boards. In "The Dropout," members of the Theranos board were vilified. 

That hightened activity about goverance had played out during the recent proxy season. In a January 2022 edition of Corporate Counsel Paul Weiss Chairperson Brad Karp and head of Sustainability-ESG David Curran explicitly noted:

"There were numerous examples througout the year of previously marginalized groups such as disgruntled employees and activists shareholders winning proxy battles and gaining access to previously undisclosed documents. This is a game-changer."

That should send an arctic chill through corporations which have no track record for earnings and which don't seem in any rush to produce them. 

With all this going on, it should be no surprise that IPOs are down.

 Axios reports:

"No companies or SPACs went public on U.S. exchanges last week, which Renaissance Capital reports is the first such week in more than two years. There's also nothing on the calendar for this week." 

Connect with Editor-in-Chief Jane Genova at janegenova374@gmail.com. She helps businesses conjure up magic in their storytelling. One client said, "She makes shipping containers ‘sexy.’"