(Bloomberg) -- Goldman Sachs Group Inc. has some advice for potential investors, who are increasingly having to consider billion-dollar share sales by loss-making companies: focus on sales growth rather than near-term profitability.
High-profile initial public offerings by companies such as Uber Technologies Inc. and Lyft Inc. this year struggled to attract investors at first due to skepticism about their ability to generate profit. The latest entrant to this cohort is WeWork, which hasn't turned a profit since its founding about nine years ago.
Read More: WeWork Is Said to Target IPO Valuation Below Last Round
But this focus on the bottom line may be misplaced. Investors should instead concentrate on firms that generate rapid sales growth during their first three years over short-term profitability, strategists led by David Kostin wrote in a note Thursday.
New listings that record sales gains of more than 20% annually are more likely to beat the Russell 3000 Index over three years than a comparable, slower-growth company, the strategists said. Most outperforming IPOs also post positive net income by year three, according to the bank's analysis.
Their research examined 4,500 IPOs completed in the U.S. during the tech boom of 1995-2000, the 2001-2009 cycle preceding the great recession and the latest round starting 2010. During all three cycles “first-year profitability had no discernible impact on the likelihood of outperformance over three years,” the strategists said. In the latest IPO period, profitability in years two and three has indicated outperformance, they said.
To be sure, Goldman itself is bringing many such bottom line-challenged companies to market. The bank tops the league table for U.S. IPO bookrunners.
--With assistance from Ksenia Galouchko.
To contact the reporter on this story: Swetha Gopinath in London at sgopinath12@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, ;Celeste Perri at cperri@bloomberg.net, Jon Menon
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