4 Loss making IPOs that doubled on listing: Hype or sustainable wealth creation?

Synopsis: A​‍​‌‍​‍‌​‍​‌‍​‍‌ few tech initial public offerings have seen their share prices double on or after a few weeks of listing due to the excitement around them, but in reality, such increases are mostly temporary for companies that are not making profits. 

The​‍​‌‍​‍‌​‍​‌‍​‍‌ Indian stock market has had both positive and negative reactions to new-age tech IPOs. Each time a major internet company announces plans to go public, the same buzz resurfaces, talks of high valuations, premiums on the grey market, and the expectation that the stock will double its value on the listing day. 

For retail investors, the prospect of money doubling in one day sounds very attractive. However, the more significant question is often overlooked: will that price be maintainable after the listing over the long term?

History​‍​‌‍​‍‌​‍​‌‍​‍‌ is full of examples that such scenarios are a short-term, crazy appearance. And that is when these companies, which either lose money or very slightly profitable, see their shares double on or after a few weeks of their listing day. Very often, this rally implies the hype around the market rather than the beginning of the sustainable long-term value ​‍​‌‍​‍‌​‍​‌‍​‍‌creation.

First, consider Zomato. It made its debut on the stock market at Rs 116, over its issue price of Rs 76 and later went up to around Rs 169 in 2021, thus doubling investor wealth. The market then was a total believer in the growth story. But Zomato was still operating at a loss during those years, and subsequently, the truth prevailed.

The share price dropped to its lowest ever point of Rs 40.60 in July 2022. This drop was a strong indication that while hype can rapidly bring prices up, only solid financials can keep them there for a long time. Zomato took almost two years, besides restructuring and achieving Adjusted EBITDA profitability, to come back from that downfall.

The same thing happened to Nykaa (FSN E-Commerce Ventures). Contrary to Zomato, Nykaa was profitable at the IPO stage, but it was valued at highly inflated figures. The stock made its debut at Rs 2,018, over its issue price of Rs 1,125 and shot up to approximately Rs 2,574,  thus more than doubling. But not even profitability could be a justification for such exorbitant valuations for a long time.

As growth unfolded and competition from players like Reliance and Tata intensified, the stock went down drastically, losing more than 74 percent from its all-time high (after adjusting for bonuses). This demonstrates that even a profitable company is not capable of holding on to overvalued prices if the valuations are not logical.

Ola​‍​‌‍​‍‌​‍​‌‍​‍‌ Electric is a standout case, just a short time ago, of how this recurring theme unfolds. In August 2024, the company made its debut at Rs 76, over its issue price of Rs 76, capitalizing on the strong e-mobility sector hype although it had reported a loss of Rs 1,472 crores in FY23. Within no time, the stock soared to Rs 157.40, thus the owners of the stock got a 107 percent return and then in no time it crashed severely by nearly 80 percent making an all time low of Rs 33.20.

The company Meesho is still incurring losses, but the turnaround is quite evident. The losses have not only been curtailed but have also seen a sharp decline from Rs 1,675 crore in FY23 to Rs 328 crore in FY24, while revenue increased by 33 percent during the same period. However, its losses again widened massively to Rs 3,942 crore in FY25 despite a 23 percent revenue growth. This figure is indicative of costs that are better controlled and of discipline being maintained. 

Majority​‍​‌‍​‍‌​‍​‌‍​‍‌ of technology public offerings in which the shares are doubled on the very day of listing or within several weeks usually unfold similarly. The rapid price increase is commonly followed by a decline as a result of the so-called lock-up expiration, i.e. the moment when early investors start disclosing their holdings, and it is only from that moment that the share gradually regains its value if the enterprise is capable of showing long-term ​‍​‌‍​‍‌​‍​‌‍​‍‌profitability.

Reviewing​‍​‌‍​‍‌​‍​‌‍​‍‌ the technology IPOs from the past reveals a prominent trend that stands out very clearly: a doubling of a stock on the very day of the listing does not signify success over the long haul. In most instances of loss-making or highly valued companies, the drastic increase is somewhat of a myth, as it is basically fuelled by the excitement and storytelling around the company rather than by any strong financial performance. Once the hype gets to its end and the early investors have a round of selling, prices tend to revert quite substantially.

The examples of Zomato, Nykaa, and Ola Electric are there to demonstrate that even strong brands can become deeply corrected if profits fail to live up to expectations. For investors, the main and most important point to be derived from this situation is to concentrate on the company’s fundamentals, profitability, and cash flows rather than on the gains made on the listing day. 

Written by Satyajeet Mukherjee

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