The June 4, 2007, edition of the Wall Street Journal reported that in 2007 many companies selling stock to the public for the first time-initial public offerings (IPOs)-are not yet profitable. According to a report issued by the research firm Sageworks, 46 percent of the companies that listed IPOs in early 2007 had shown nothing but losses, the highest percentage since the dot-com bubble in 1999 and 2000. The CEO of Sageworks was quoted as saying, “Traditionally, there have been some rules of thumb about when to go public, and one of them was that you should have profits.” The research report was issued at the same time that the Dow Jones Industrial Average and the S&P 500 stock index hit their record highs.
Required:
a. Why did the research report compare the IPOs in 2007 to the era of Internet companies going public?
b. What are the risks to investors if a company has never shown profits?
c. What is the connection between the number of IPOs from unprofitable companies and the record levels of the stock market?
d. The article stated, “Investors now want more than pie-in-the-sky promises of future profits. They are looking at revenue and cash flow and want specific timetables for profitability before buying shares.” Discuss this quote and its connections to the financial statements.