I always find it interesting the hype that goes into some companies going public. When The Wife knows about a company going public, that is when you know there is almost too much information flowing from wall street to main street! I try to ignore the hype, but like anyone who watches the market sometimes you get swept up in the hysteria. I came across a terrifying list of recent highly publicized IPOs and their returns.
What is an IPO?
I don’t think it explains much, but damn it do I love this scene from Wolf of Wall Street:
So really, what is an IPO? Both Wikipedia and Investopedia describe it well:
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company usually are sold to institutional investors that in turn, sell to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Initial public offerings are mostly used by companies to raise the expansion of capital, possibly to monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as going public.
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.
Recent Highly Publicized IPO Results and Returns
Obviously, the following table from MktOutperform (Charlie Bilello, CMT) is outdated the moment he sent it out, but the point is still the same, you likely don’t know shit about the IPO market:
Or as an embedded Tweet
The IPO Market…
Where Unicorns go to die.
But all hope is not lost … you still have the Facebook. pic.twitter.com/clLyM3gEDK
— Charlie Bilello, CMT (@MktOutperform) February 11, 2016
Why is it likely that You (or I) don’t Know Shit about the IPO Market
Some of those equities have been public for a few years now, but the overall problem with buying an equity early in its public life is that the normal, retail investor is unlikely to know the the real money’s intent, deal or details with regards to their shares. What do I mean by real money? Hedge funds, pensions, private equity and mutual funds. I would guess that
Some common reasons for a drop despite nothing actually changing with the underlying business:
- You buy shares on 1/1 but on 1/9 key executives/employees come out of restricted status and they flood the market. Same thing can happen for the real money’s shares
- Real money decides one day that they don’t like the metrics and/or growth (or lack thereof) which were originally built into the company.
- The underwriters priced the initial offering incorrectly.
Just like anything risky real money can be made with IPOs, but I tend to keep myself a bit safer as I don’t have the risk tolerance.