I’ll be the first one to admit that I’ve been a pretty harsh cynic when it comes to most IPOs. And if you know me, then you know I almost always avoid them; and for good reason, too.
We see the same story play out over and over again: A hot company files to go public, and when trading actually begins months later, shares soar the first day, or over the first few sessions. The stock pops 25%, 50%, even 100%, and the well-connected privileged few who were actually able to get shares at the IPO price make out like bandits. It seems as if the stock will always go up and you missed your chance to get in on the ground floor.
But that’s only one side of the story. Often times, some or all of those early profits are given back, and then there are the IPOs that start out as duds. Facebook (FB) offers a lesson in the pitfalls of IPO investing. The company went public in May of 2012, and shares promptly imploded. After initially pricing at $39 and finishing the first day of trading below that level (usually an ominous sign for a “hot new issue”), over the next few months they crashed by half to the mid-teens.
However, fortunes have reversed since then, of course, as the stock is now trading about 15% above the offering price. Numbers have been impressive for the company as well, as revenues were up more than 50% in the latest quarter versus a year ago. And of course there’s that staggering number of Facebook users: a billion and counting.
For 2013, it looks like times are changing. Though the IPO market has been on a tear this year — Renaissance Capital recently estimated that the number of companies filing in 2013 was up 40% over 2012 — there’s still time to take a breath and examine the companies going public. There are both scheduled debuts and those companies that have filed with the SEC to go public over the next few weeks and months.
My biggest advice? Trading may be frenzied when an IPO comes to market, so it’s important to use the same techniques to “know what you own” as any other stock that makes its way into your portfolio.
With the market so hot right now, I thought you might find it interesting and helpful to talk about the hottest IPOs — both those coming to market and those with lots of buzz surrounding them. We’ll start with two of the biggest: Twitter and Square.
Twitter is the latest social media behemoth with plans to enter the public markets–possibly the most buzzed about IPO this fall. Most IPO industry watchers think Twitter will come to market before 2013 ends. Last week, the company’s S-1 form was released, revealing an inside look at the company’s numbers. Revenues for 2012 were $316.9 million, with a loss of $79.4 million; and in the first half of 2013 they’ve already earned $253.6 million with a loss of $69.3 million. Yes, you read that right. Twitter is still losing money. However, investors are going to bet on continued growth in sales, which have outpaced expenses in the last three years.
I do like their business model; Twitter’s ad-driven revenue model makes sense because promoted tweets and hashtags can help bring people together instantaneously. I also believe that Twitter will continue to be huge in mobile advertising. Really, really huge. 18% of ALL interest users are on Twitter, giving it a big global presence. Some reports even say that Twitter could garner as much as $1 billion in revenue next year, and be worth $9 billion or more after it goes public.
While I am a big fan of Twitter, I will not be jumping on the bandwagon as soon as it comes to market. Let’s face it, the market is littered with the debris of social media stocks like Zynga (ZNGA), Groupon (GRPN) and for a while, Facebook. Investors become disenchanted with sky-high valuations on companies investing a lot to grow their top lines, with little to show for it in net income. But this “micro blog” company is here to stay, and I think it’s the best way to play social media, with perhaps the best strategy being to wait for the shares to go public, let the frenzy die down, and then buy on a pullback.
Square’s co-founder, Jack Dorsey, is also the co-founder of Twitter. (The man clearly knows how to create game-changing companies!) Square has been rumored to be an IPO candidate for months; by the time the shares are listed you should be looking for a good entry point. Electronic payments have become a fast-growing alternative to cash, and Square is right in the vanguard of that revolution.
Square enables transactions just about anywhere and between just about any buyer and seller, from large companies to the smallest “mom n’ pop” stores and even between individuals. A seller just has to swipe a buyer’s card through a Square card reader, and the payment goes through — on virtually any device. There’s even Square Wallet, which lets iPhone users pay without having to take out their phone.
There’s no doubt that the cash-less society is evolving. Square gets revenues from taking about a 2.75% slice of the payments its devices process — and management recently said it is processing at least $15 billion in transactions annually. That doesn’t even include a deal with Starbucks where Square Wallet lets you use the app to pay in the store with a simple tap on your mobile device screen.
Square competes in a crowded space, as many companies want to own a piece of electronic payments. Even credit card companies are offering their own card readers, with lower fees. While a “price war” may eventually overtake technology and impact Square’s sales growth, that impact is a long way away. For now, Square has a real lock on payment via mobile technology.
Make sure to check back next week for the next two companies on my IPO list!