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What is an IPO? #investment #IPO

What is an IPO?

An initial public offering, or IPO, is the first sale of stock issued by a private company to the public. Thus representing the moment when a company turns public. The moment where you can invest in a company through a stock exchange, and can easily access reports showing information about operations, profit, revenue, and so on.

Why do companies want to do an IPO?

Companies have different ways of raising money: through private investors, borrowing or making an initial public offering. Having private investors or an IPO is very similar, and are useful in different situations. Basically, the owners give a % of the company and in return receive money.

I can raise money through private investors virtually at any moment of the company. Startup phase or in a more mature stage of the company. On the other hand, IPOs typically occur in a more mature stage of the company and especially when markets are in all-time highs (or at least in favorable conditions, meaning when they’re positive and rising – bull markets).

Largest IPOs

CompanyYear of IPOAmount
Agricultural Bank of China2010$22.1B
American International Assurance2010$20.5B
Enel1999$16.59B
Facebook2012$16.01B
General Motors2010$18.15B
Industrial and Commercial Bank of China2006$21.9B
NTT DoCoMo1998$18.05B
SoftBank Group2018$23.5B
The Alibaba Group2014$25B
Visa Inc.2008$19.7B

As you can see the amount of money that can be collected via stock market can be really outstanding. Look at the recent ones such as Alibaba with $25 Billion or SoftBank with $23.5 Billion. Amazing.

Should the “average joe” invest in an IPO?

If you look at the more recent example Lyft, you will see that in the first day in the stock market, the company surged 20 percent from its IPO value. In the second day it went as low as 66$ (below the $72 IPO price).

Lyft is a curious example. The fact that the company doesn’t have any profit, and the $25 Billion valuation (I’m considering the end of the first day price of $78) is something difficult to entertain.

Personally I found it hard to believe that a company without any profit can reach these values. You can argue that the growth of revenue (doubled its revenue in 2018, to $2.2 billion, from $1.1 billion a year earlier), the increasing number of riders (+19 million), or the number of rides (+178 million) can explain a lot, but still… Zero dollars of profit? Not only zero but a negative result of 911 million dollars?! This is madness. Maybe the future will prove me wrong.

An IPO that was good for investors

Facebook held its initial public offering on May 18, 2012. Initially, the company was aiming for a valuation somewhere from $28 to $35 per share. The final value was set to $38.

Were the investors at that price point successful? Or did they overpaid?

Facebook has a stock price of $175 (07-04-2019), so apparently and looking back, this was a very successful IPO for investors.

From 18-05-2012 to 05-04-2019 these were the returns for Facebook and SPY:

Facebook: +465.20%

SPY: +152.74%

FB vs SPY GrowtoRetire.com and source graph: www.koyfin.com
Source: KoyFin

Another way of investing in IPOs

Until now in this blog post I’ve talked about investing individually in a particular IPO. But is there a way of investing in multiple IPOs? And how is that going?

You can try to find active mutual funds, but here I’ll write about something else: ETFs. Exchange traded funds that invest only in companies that (recently) went public.

Here are some examples:

Renaissance IPO ETF

This ETF for example, adds a new company to its basket within 90 days of listing and removes a firm after 2 years of public trading. It will be naturally a bit on the concentrated side. Thus explaining the number of holdings: 71.

How successful was IPO (the ETF…) in comparison with a more broad ETF (for example SPY)? Depends on the dates you chose.

Total Return (including all dividends): Oct 16, 2013 – Apr 05, 2019

IPO: 58.2%

SPY: 87.0%

Volatility:

IPO: 18.0%

SPY: 13.1%

Stock VS ETF IPOs VS ETF Mr. Market

Since the inception of this ETF (IPO) the returns are inferior to a simple S&P500 ETF. And with more volatility. No one knows the future, and if you see the returns for the last 3 years, the IPO is winning the SPY. Therefore it may add some value for those who really want exposure to companies that recently went public.

I prefer the KISS methodology. Keep it Simple Stupid. I believe that a low-cost, well diversified ETF, will do just fine on the long run.


About GTRetire

GTRetire is the founder of GrowtoRetire, a blog about financial independence and early retirement. Click here to learn more about starting a blog! Also, this post may contain affiliate links, please read the disclaimer for more info.

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