Education - June 5, 2019
5 Things To Know Before Buying an IPO
IPOs? More like IP-woes, am I right?
Unless you got in on Beyond Meat (BYND) early — good for you if you did — you’re probably eating losses from that IPO you bought into this year.
While Beyond Meat, PagerDuty (PD), and Zoom Video Communications (ZM) have debuted with well-deserved hype, other big names like Lyft (LYFT) and Uber (UBER) have failed to live up to expectations. Several other “unicorns” (startups with a valuation over $1 billion) have also listed on public markets in the first half of 2019, and there are still a few more slated to go public before year’s end.
However, after private companies with massive valuations (and massive losses) received not-so-warm welcomes from public investors, cash-rich startups are actually punting on their original IPO plans. Palantir, the secretive data-analytics company co-founded by Peter Thiel, has reportedly pushed back its expected IPO date to 2020 due to reduced appetite on the public markets and other organizational reasons.
By nature, IPOs are big risk, big reward; investors have relatively little access to information and financial history with which to evaluate new listings. But how do you know which companies will thrive long term? Would you be better off investing your money elsewhere? What should you look for when evaluating a new IPO?
We analyzed 10 years of IPO history to answer the questions above and others. By evaluating major IPOs — the 25 largest from each year that are still trading — from 2009 to 2018, we can gain valuable insights for evaluating IPOs in 2019 and beyond.
If you’re looking to invest in an IPO in the near future, you should consider these five factors:
1. Only 38% of major IPOs have shown better returns than the broader market
“I swear, I almost bought Amazon at $4 back in ’97. If I had, I would be on my yacht right now.”
Sound familiar? Not even fishermen tell “big fish” stories as well as regretful investors do. But you’ve probably never heard someone say, “I was so close to buying an index fund back in ’98, but I missed my window. Too late now, I guess.”
Sure, it’s exciting to say you were an early investor in one of the biggest companies ever, but the data shows that about two-thirds of the time, you’d be better off just investing in the market.
We considered a hypothetical decision that investors would have faced: buy shares of a company on its IPO date or buy shares in an S&P 500 index fund, SPY, on that same date. We found that, since listing, only 38% of major IPOs have had higher Annualized Total Returns than the S&P 500. The chart below illustrates this point.