Jun 10 2021 (Thu)
Over the course of the financial year IPOs are a very normal thing. It’s common now to see a new IPO almost every single day, or so it seems. However not all IPOs are the same. Often, we don’t hear of every single IPO that is coming due. Why is that? A large portion of IPOs don’t get the same recognition and media coverage as others, and this, believe it or not could play a role in the way each IPO is valued. We are going to look at the history and performance of IPO stocks and see why the 10 mentioned might be worthy of an investment.
First what is an IPO? If you were unsure an IPO stands for an Initial Public Offering. Which means that it is the first time a company’s stock will be available to public investors. Giving them the ability to purchase shares on the designated listed exchange, for example the NYSE.
There are both positives and negatives for investors when buying shares of an IPO. The positive being that it gives the opportunity for the investor to get in as early as possible to a company that hopefully with time will produce greater growth and ROI than an already established company. Whereas the negative being that there tends to be very little financial information for new IPO’s. On top of the very little financial information to go off of companies that IPO tend to fall over the long run and is very common for many companies to never reach there IPO valuation again. This begs the question of how these companies are being valued pre-IPO.
There are a few main factors that can influence the valuation of an IPO. The main one being the overall demand for the company shares in the market. Naturally the higher the demand for the IPO shares, the higher the price gets. The question is where does this demand come from?
If there were large amounts of financial data on these IPO companies, we might be able to justify the valuation in a more quantitative way. As well as forecast demand better than what is currently done. Whereas due to the lack of financial information, the demand for shares, similar to the demand for products and services can be influenced greatly by trends, company marketing and media coverage.
It is known that many IPOs happen in the middle of certain trends. For example, the dot.com bubble. In the late 1990’s the upcoming trend was the amazing technology of the internet. Where companies would IPO with little to no track record and even some would just IPO based off of promises.
Notably an IPO for eToys which was valued highly due to the idea behind offering toy products online as well as the huge trend of internet companies IPO. Ultimately eToys didn’t actually have the size of operations, or business capacity it needed to be valued so highly. Then as the dot.com bubble burst so did eToys. During this time, it was common for these IPOs to be valued at multimillion valuations because they were to technology IPO during a time of extremely high demand for new internet related technology.
More factors that go into valuing an IPO which are more based on fundamentals is the comparing of multiples to already public companies in the sector. The downside to this as previously mentioned companies that IPO generally don’t have the same robust financial information on them. Making these comparisons generally more difficult to have confidence in. This as well as trying to value future growth prospects of the company are two more fundamental ways to value a company before they IPO. After all the reason a company should IPO is to raise funds so that they can use those funds to grow their business. If an IPO doesn’t have future growth plans for the funds raised from the IPO this could be a very bad sign.
To look into this further I have selected a short list of 10 recent IPOs spanning across the last few months, as well as different sectors.
After analyzing the early performance of these recent IPOs, it seems easier and easier to predict how a new IPOsrice may act and harder and harder to predict their long-term future price. There are certain differences that may lead to price differences but overall, there definitely seems to be a pattern, or possibly a process of companies newly entering the market.
Within the short list the majority of IPOs followed a pattern. Where on the day of IPO saw the price of their stock rise significantly. This makes sense and is in line with the idea that the increased demand from investors who previously didn’t have access to the shares causes an increase in price.
This wasn’t true for all the stocks in the short list but was true for the majority. Where this pattern failed was with Squarespace IPO, Ziprecruiter IPO, and Coinbase IPO where they did not IPO in the conventional way as they all decided to IPO as a direct listing. With all three of them choosing this IPO route due to them ‘not needing’ the capital a conventional IPO would bring. It is normal for a direct listing to not receive the same increase in demand even though these 3 firms were well known.
After the increase in demand there seems to always be a sell off of shares after just a few days. This is again caused by possible change in demand for the shares. However, it may be related to the demographic of investor. Certain investors like to take advantage of very short-term plays. An investor who is aware of this pattern in IPOs could try to take advantage of a short-term spike in the price with them deciding to sell days later. After all the long-term investors would probably want more robust substantial data on the company before investing. The change from more buyers to more sellers within days of IPO can point to the overall demographic of investor being short term. This change ultimately alters the demand for the shares and ultimately affects the price in a negative way.
In the short list there is one case where this did not happen which is Five Star Bancorp. A financial company in which there could be a few reasons to this. One could be investors changing to market trends and economic data rather than the company data itself. A change in investing strategy where a trend to move their portfolios into financials have been recent. May also be because of the positive media coverage since the IPO essentially gaining more demand and interest post IPO rather than what seems to be the norm with others gaining that demand pre-IPO.
Finally, there is a similarity in which I found happens after the first quarter IPO and I believe that it relates to why the valuation of IPOs seem to be so uncertain. That is that after the first quarter earnings reports come out and so on into the public existence of the company there begins an introduction of financial and performance data.
We can see this happening in both Impel NeuroPharma and Latham Group examples from the shortlist. Where positive earnings reports for Impel NeuroPharma have caused a reversal to their downward trend, and under performance reports of Latham group have caused what looks to be a reconciliation of price.
The more financial and performance data that becomes public the more weight put on fundamentals when considering the price of the stock. Where previously before and during the IPO the weight of the valuation may be on trends, marketing and media coverage; the after math of the IPO brings around a reconciliation of price due to greater and greater weight being put on financial data in relation to price.
Follow BrettLandles as he builds out his portfolio for 10 IPO stocks and conducts a deep dive analysis into each one. He is finding great IPO stocks to see if they make sense to add to your investment portfolio.
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