SpaceX Anthropic OpenAI Are all those companies which have mammoth valuations on paper but return to investors are miser.
Big tech IPOs with high valuations but low or negative returns don’t just disappoint—they drain. By swallowing enormous sums of investor money, they redirect capital away from consistently profitable companies like Samsung and Walmart, as well as smaller, well-run firms that actually deliver returns. This misallocation doesn’t only hurt those better businesses; it risks creating a negative market trend, stalling development, and ultimately paving the way for a market crash.
This is a sharp observation, and on a real tension in how capital markets function. Let me break down the mechanism you’re describing and then add some nuance about when and why it does or doesn’t lead to a market crash.
How big, low-return IPOs can harm the broader market
Your logic follows a plausible chain:
1. Capital absorption – A massive IPO (e.g., a highly valued tech company with weak or negative earnings) sucks up tens of billions of dollars from public markets. Institutional investors, ETFs, and mutual funds reallocate to get their allocation.
2. Opportunity cost – That money could have gone into established profitable companies (Samsung, Walmart, etc.) or promising smaller firms with solid fundamentals.
3. Misallocation of capital – If the IPO money goes to a company that destroys value (overpriced stock, poor returns), that capital is effectively wasted. Over time, this lowers overall market efficiency.
4. Crowding out – Good companies may see their stock prices stagnate or fall, making it harder for them to raise follow-on capital. This slows job creation, R&D, and economic growth.
In an extreme scenario, if many such IPOs happen in a bubble, and then those stocks crash, they can indeed drag down indices (since big tech has high weightings) and trigger broader selling—especially if margin calls or leveraged positions unwind.
Why this doesn’t always cause a crash (countervailing forces)
Markets have mechanisms that partially correct the problem you describe:
- Price discovery – If a big IPO is overhyped but has poor fundamentals, it often debuts strongly, then drifts down over months. Patient capital (value investors) avoids it, so the “chunk of money” isn’t as large as feared—because much of the trading is speculative, not long-term committed.
- Liquidity is not fixed – New money enters markets via savings, pensions, and central bank policies. A large IPO doesn’t necessarily “crowd out” Walmart; it may simply absorb new inflows or come at the expense of other overvalued stocks, not solid profitable ones.
- Rotation, not disappearance – When investors sell profitable companies to buy a hyped IPO, they eventually realize the mistake and rotate back. Historically, quality value stocks (Walmart, Samsung) often outperform during IPO-heavy frothy periods, because defensive investors flee to them.
- Primary vs secondary markets – IPO proceeds go to the company (which may burn it). But secondary market trading mostly just transfers ownership. The real damage happens if the IPO company later raises more cash via dilutive offerings—but that’s a separate event.
Historical examples that support your concern
- Late 1999–2000 – Dozens of money-losing tech IPOs (e.g., TheGlobe.com, VA Linux) raised billions. Capital fled profitable old-economy names. When the bubble burst, the NASDAQ fell ~78%, and many solid companies were also dragged down temporarily, though they recovered faster.
- 2021 SPAC boom – Highly speculative electric vehicle and space startups went public at huge valuations, absorbing massive capital. Many collapsed by 2023. Meanwhile, well-run profitable companies saw muted returns until the speculative froth cleared.
When it doesn’t cause a crash
If the big IPO is Truly transformative (e.g., Google 2004, Amazon 1997, though neither was “low return” at IPO), the capital is actually productive.
If the IPO happens in a High liquidity environment (central bank easing), no crowding out occurs.
If Index composition changes slowly – The new big tech company won’t enter major indices immediately (e.g., S&P 500 requires profitability for 4 quarters as of 2025 rules for certain listings), so forced buying by passive funds is delayed.
The real danger is not one IPO, but a sustained pattern
Your scenario becomes dangerous when:
- Multiple large, low-return IPOs happen back-to-back (e.g., 2021: Rivian, Robinhood, Coinbase).
- Valuations detach from fundamentals across a whole sector.
- Leverage is high – Investors borrow to buy these IPOs.
- Profitability is ignored for years – Then the unwind is brutal.
But a few big tech IPO with poor returns (e.g., Uber 2019, Lyft 2019) usually just hurts its own shareholders, not the entire market, hopefully. However, this time it is really giant size and when the market is dull due to many reasons.
Conclusion
You are correct that capital misallocation to low-return, large IPOs can reduce overall market efficiency and hurt good companies’ access to investment. Over time, this can contribute to a negative trend and, in extreme bubbles, a crash. However, markets are resilient enough that one or two such IPOs won’t collapse the system—what you’re describing is essentially the bubble dynamic seen in 2000 or 2021. The key is whether the broader market has discipline (value investors, short sellers, profitability screens) to correct the mispricing before it becomes systemic.
