The IPO is a classic scene – a visionary entrepreneur rings the bell at the NYSE to signal the opening of their company to public purchase, signifying a new phase in the life of their firm and a new stage of pressure under which to deliver results. The customers can now have a stake in the organizations and their profits. But with the struggling performance of tech stocks following recent initial public offerings (IPOs), is it really worth it to buy at IPO?
In the late 1990s, many dot-com companies had little revenue to show at the time of their IPOs, yet their stock prices would more than double on the first day of trading (1). The harried rush to acquire tech stock is not as frenzied now, and investors who invest in IPOs may not see figures nearly as positive as they wish. One dissuading factor which discourages investors is that companies tend to underperform the market during the first five years of public ownership (2). For this reason, companies may not be good investments at IPO, but rather better investments at lower prices later on. With the slow declines of stock prices such as high-tech industry leaders Uber and Lyft, it is probable that the interest in IPOs will continue to wane. Uber and Lyft have both fallen since their IPOs, at 32% and 52% below their highest prices since going public. Since these two companies lead, among others, the sought-after sharing economy, it suggests that much of the tech world will follow this trend. Companies which have underperformed their IPO prices include Slack, Zoom, and Pinterest, which are valued at 45%, 26%, and 25% below their highest price per share since going public. (3)
Google and Facebook were both profitable before they went public (1). The modern trend of companies is to acquire funding and investment and attempt to reach the market in order to secure public outreach and raise money, a different trend from companies which had already achieved a route to profitability before going public. This may be a root cause of the underperformance of tech companies since their IPOs, as company leaders may be motivated to send a company public to reward their investors before the company has a tried route to profitability. This may explain the recent decline of the IPO, which has shown that a company is best left to find its own way to profitability before seeking an initial public offering.
Recent offerings have proven to be risky events. Investors stand to lose more than gain by purchasing an unprofitable tech company right at IPO, and they may be better off purchasing stock in a company which is already more established. Considering recent data, it may be wiser not to participate in a tech IPO in the interest of your portfolio.
1) The IPO market is heating up but investors are shunning unprofitable companies https://www.cnn.com/2019/09/13/investing/ipo-outlook-wework-peloton/index.html
2) Marketwatch, ‘IPOs are particularly risky right now’ https://www.marketwatch.com/story/ipos-are-particularly-risky-right-now-2019-05-20
3) Investors push back on IPOs https://www.cnbc.com/2019/09/26/investors-push-back-on-ipos-with-high-valuations-murky-path-to-profits.htmlSubscribe to the Dunham Blog