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Public investors are doing something counterintuitive: They’re valuing unprofitable companies higher than they are profitable ones that entered public stock exchanges last year. Those are the findings from a new PitchBook report on the stock performance of US unicorns.

The study looked at the median stock-price change for startups valued at more than a billion dollars when they went public.

For the unprofitable* ones that went public in 2018, their median stock-price growth has been 120 percent on an annualized basis, from the IPO offering price through March 12 of this year. The median decline for stocks that were profitable has been 57 percent for 2018.

DocuSign, for example, has been consistently unprofitable before and after its April 2018 IPO. It’s currently trading at about $57, well above its $29 offer price.**

In general over the past nine years, profitability has barely made a difference for performance.

A couple big caveats here: Only a couple of the 20 US unicorns that went public last year were profitable, so the sample size is very small. Also, since this data is looking at compound annual growth rates, big jumps or dives in price for first-year stocks will look more inflated than they will likely be over time. Still, the money-losing companies that dominate the sample are doing relatively well enough to show there’s a definite public appetite for them.

“In general, you’re not seeing a huge preference either way in public markets for if a company has been profitable or unprofitable at its IPO,” Cameron Stanfill, an analyst at PitchBook and the report’s author, told Recode.

That says more about the market than the companies and means that investors are prizing future growth over present profitability.

“They believe in the business model and are disregarding the current state of profitability at the IPO,” Stanfill said.

That’s the same as with some private investors and venture capitalists, who are taking these companies public in the first place. Indeed, unprofitable companies are going public at a record rate, one not seen since the dot-com bubble.

Of course, the dot-com bubble did eventually burst, so it’s difficult not to see this latest round of unprofitable IPOs as grim tidings.

However, there are a few stark differences.

Many unprofitable companies could be profitable if they switched their focus from growth to profit. Spotify has long said it could be profitable if it weren’t trying to grow. It recently became profitable for the first time, less than a year after it was listed on the stock market. Lyft — for a 2019 example — could have had a positive net last year if it didn’t spend any money on advertising or R&D. Not spending that money, however, would stop it from gaining more customers. It would also stunt the company’s dream of developing a future of driverless cars, a plan that could see Lyft taking a bigger cut of revenue.

The companies that are going public lately — basically all of which are tech or biotech companies — are also older and have more established revenue streams and business models than their dot-com counterparts. Lyft generated $2.2 billion in revenue last year, a sum unimaginable to the internet companies of the late ’90s.

Still, when a recession hits, likely within the next two years, the crowd will certainly be thinned.

“Those that are profitable will potentially be in a better position,” Stanfill said. “A company is more defensible in downturn if it’s making a profit.”

* PitchBook is looking at IPO profitability using Ebitda margins, which add back in interest, taxes, depreciation, and amortization. True profit would be lower.

** These price changes are from the offering price through March 12, 2019. The offering price is the usually lower price institutional investors buy stock at right before it’s traded on the public market.

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