IPO valuations

Why Investors Should Beware of IPO Valuations

In Articles, Investments, Risk Management by Brad Stark

By Brad Stark, MS, CFP
Founder and Chief Compliance Officer

 
An Initial Public Offering (IPO) often times gets mixed perceptions between retail and institutional counterparts. For starters, investment bankers are trying to extract the highest premium values while the public also wants to hit a homerun. Some institutional firms such as DFA (Dimensional) won’t touch an IPO for around six months as the academic data tells them that it takes this long for “normal” trading volume to take place and for an efficient market price to be established.
 
This past week, Uber had their long anticipated IPO to the disappointment of both the public and private investors. Since 2016, Uber has privately raised $15.35 billion at $48.77 per share and then on the IPO, they sold another $8.6 billion at the slightly lower price of $45 per share. As of the time of this writing, the price was $37.70.
 
Doing the math, approximately 81% of all the shareholders of Uber (pre and post IPO) are underwater.
 
Other recent high profile IPO’s did not favor well to help validate the work of DFA;

  • Lyft opened around $80 and now trading at $48.50.
  • GoPro opened at $35, soared to over $100 before dropping back around the IPO price six months later (but further falling thereafter).
  • Snap opened at $27 and has never seen that price since (as low as $5).
  • Blue Apron opened at $10 and is trading below $1.
  • Spotify opened at $150, soared to $200 and seven months later, it has not traded above the opening price.
  • Dropbox opened at $30 and trading above that mark shortly before dropping to $20 and settling around the $25 range.
  • iQiyi (Netflix of China) opened at $15, soared to $40 before dropping to the IPO price eight months later.

Going back in time, Facebook did not trade above the IPO price until about 8 months afterwards.
 
However, not every IPO goes this way but these are good examples of the highest profiled IPO’s of this past year. Several that have bucked the trend recently have been Roku, Carvana and The Trade Desk (3 out of the 10).

 
Mission Wealth’s philosophy is that of a long term investor, and short term trading of IPO’s is a risky proposition. Overall, if we are going to invest in private equity, we generally prefer the debt or real estate asset class because we can invest at a fraction of the value of the equity holders (debt) or have real third party appraisals to establish fair value.
 

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