IPO or IP Uh-Oh?

Over the last six months, several high-profile companies have decided to sell shares in the public stock markets. Companies like Uber, Lyft, Pinterest, Zoom Video and Levi Strauss all made the news when they “IPOed.”

IPOs are “Initial Public Offerings,” in which a private company sells shares of itself to the public market. IPOs are often carried out to allow the original owners to monetize their shares or to raise money to improve and grow their company. Once a company’s shares go public, investors can easily buy/sell a slice of these businesses.

So, let’s talk about three questions you might have about IPOs:

The prices of these IPOs are rocketing, shouldn’t I buy some? Headlines that read “XYZ shares trades up xx% on their first day of trading” seem common and it makes it look like it’s easy to make money by owning shares in these companies. Unfortunately, these headlines (surprise, surprise) are exaggerated. The media often calculates these price increases based on the company’s offering price. But… you and I cannot purchase the shares at that price! What we can do is make a purchase at the opening price, which is often a much higher number. For example, Lyft’s offering price was $72, but the opening price was over $87. When using offering price as the starting point, this looks like a 21% “pop,” but it’s only the original owners that profit from these gains. (Side note: Lyft hit $59 in this week’s trading.)

These companies are killing it, shouldn’t I buy some? Uber, Lyft, Pinterest, Zoom are all rapidly growing companies that are disrupting complete industries. Even though getting around town, sharing and finding recipes, and holding business meetings will never be the same, this does not mean there are great profits ahead for these companies. Commercial airlines changed everything, but investing in airline companies has historically been a horrible investment as shown by the 545 airline companies that have gone defunct. The same can be said about personal computer companies (175 defunct), telecommunications companies (89 defunct) and other disrupting industries. Opportunities drive competition; competition lowers opportunities and long-term profits.

Surely the most hyped companies have different results, right? The short answer is No. Just take a look at the companies listed below. These are the firms that had the biggest price jumps on their first day of trading.

How many of these names do you recognize? I’m guessing the number is quite small because most have gone bankrupt or were merged out of existence. As far as I can tell, only five of these companies still exist under their original names. Unfortunately, the performance is awful for these survivors: Akamai is down 76% from its peak, GigaMedia is down 98%, Internap is down 99%, and Castlight Health is down 92%. Beyond Meat is the most recent addition to this list and it’s currently bucking the trend as the company’s stock price continues to climb.

The bottom line: Only the financial media makes money through the hype and headlines.

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