Investing

Ex-Nasdaq CEO Greifeld warns that recent IPOs' unclear path to profits reminds him of tech bubble

Key Points
  • Former Nasdaq CEO Bob Greifeld warns that this year's IPO boom feels similar to the late 1990s tech bubble.
  • "In a sense, it reminded me back of the dot-com era, when you had companies going public that had no known path to profitability," he says.
  • "We shouldn't be sounding great alarm bells" about IPOs, Greifeld says, but he adds that "post-WeWork, if you don't have a path to profitability, you're going to need that."
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Companies were debuting without a path to profitability: Former Nasdaq CEO

Former Nasdaq CEO Bob Greifeld warned on Monday that this year's IPO boom feels similar to the late 1990s dot-com bubble.

"It's important to recognize that the IPO market was getting quite bubbly [nowadays]," said Greifeld, a CNBC contributor and author of the new book, "Market Mover: Lessons from a Decade of Chance at Nasdaq."

Many companies with billion-dollar valuations at the time of their initial public offerings this year got cool receptions on Wall Street. Shares of Lyft, Uber and Peloton are all among the worst performers since their market debuts.

"In a sense, it reminded me back of the dot-com era, when you had companies going public that had no known path to profitability," said Greifeld, chairman of high-speed computerized trading firm, Virtu Financial.

During the 1990s dot-com bubble, highly speculative internet stocks were the hottest assets on Wall Street, pushing the tech-dominated Nasdaq up more than 500% from 1995 until the bubble burst in March 2000. The Nasdaq crashed nearly 80% from 5,048.62 before bottoming in October 2002. It took 15 years for the Nasdaq to close above its prebubble record high. Since April 2015, the Nasdaq gained nearly 60% as of Friday's close, which was about 4% from July's all-time closing high.

In a CNBC "Squawk Box" interview Monday, Greifeld referenced the WeWork IPO, which was pulled last week after a summer of volatile headlines about slashed valuations, confusing corporate governance, and a more than $900 million loss for the first six months of 2019.

"That to me was in some ways a parody of some of the hubris you see in the start-ups," he said.

However, Greifeld said the current IPO market is "alive is well," despite some of this year's bombs.

"We shouldn't be sounding great alarm bells," he said, but added, "post-WeWork, if you don't have a path to profitability, you're going to need that."

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Companies going public this year will likely produce the lowest profits of any year since the dot-com bubble, according to analysis from Goldman Sachs last month. Just 24% of 2019 IPOs will report positive net income this year. In 1999, a year before the internet bubble burst, 28% of IPOs reported positive net income in their first years as public companies. That fell to 21% for companies going public in 2000.

"If you can show profitability, you'll be fine" in the current investing environment, Greifeld said. However, he stressed, "At the end of the day, you've got to take away the hype."

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Key Points
  • CNBC's Jim Cramer says that too many initial public offerings coming to Wall Street pose a greater risk to the stock market than the U.S.-China trade war.
  • Many companies with billion-dollar-plus valuations at the time of their 2019 IPOs got cool receptions on Wall Street.