IPO investing is not like it used to be. More and more companies are going public without any earnings, defying traditional valuation methods. Buy and hold without proper analysis is no longer a sure bet on generating alpha.
Research confirms this, showing that returns in more recent data sets shows that than absolute returns during this designated time frame is been negative.
From 1980 to 2016, the average six-month return for IPOs is about 6% or 2% excess return, versus the over 18 percent average gain on the first day over the past 40 years, according to the data. The more recent data set from 2000 to 2016 shows negative six-month absolute and excess returns.
Taking a look at a longer time horizon of five years, research from University of Florida professor Jay Ritter showed that more than 60% of IPOs from 1975 to 2011 had negative absolute returns after five years.
That’s enough to take a closer look when evaluating IPO investing.
On the tech side, with the choppy performance of the Lyft (NASDAQ:LYFT) IPO, pricing for the forthcoming Pinterest IPO and Uber IPO has been in question. Much has been made of LYFT’s underperformance, but fundamentals will ultimately rule the day for Pinterest and Uber.
IPO Investing and Pinterest
If you find yourself with shares of the Pinterest IPO, which will trade under the ticker “PINS,” and get a first day pop, it might be wise to take some profits.
Investors may point to big investment firms like Kleiner Perkins, Vanguard, and John Hancock Investments having invested at the per share equivalent of $21.54 during Pinterest’s Series G and Series H funding rounds, but it simply shows that valuation excesses can exists in private markets as well.
It would be a mistake to assume that just because smart money like Kleiner Perkins is underwater based on the suggested Pinterest IPO range of $15 to $17 per share that the stock will trade up.
The problem with Pinterest is that it gets lumped into the tech sector because it’s an online business but isn’t actually revolutionary in any way. In the Pinterest IPO prospectus, terms like “high growth” and “leading brand” are often repeated. However, the fundamental advertising-based model is tenuous without a true moat around a business.
Right now, Pinterest claims 250 million active users, but with the click of the mouse, those users can be gone because Pinterest has not built an inherently “sticky” platform. Discovering ideas and getting inspiration can take place on any website or app. All it takes is a “pinnable” Instagram of sorts, and Pinterest will have a hard time keeping up its growth figures.
IPO Investing and Uber
Despite also posting consecutive years of losses in the years leading up to its IPO, Uber has shown explosive growth across multiple metrics. We are now looking at a company a does 14 million trips per day on six continents in over 700 cities. Last year, Uber hit 10 billion rides facilitated.
It’s important to remember that Uber is a growth story. When IPO investing in Uber, investors are getting more than just a ride-sharing company with extensive scale and a huge market that’s growing. Ride-sharing is the core business at the moment, generating the lion’s share of revenue—$9.2 billion in 2018 up from $3.5 billion in 2016.
Moving forward though, food delivery via Uber Eats and Uber Freight differentiate it from competitors and could drive growth far beyond analyst expectations.
Uber purchased Careem just last month, complementary ride-sharing and food delivery business spanning 115 cities across the Middle East, North Africa, and Pakistan. Uber is aggressively expanding its international footprint and in areas that they’re already experts in. These geographies already have high smartphone penetration and low rates of car ownership, making it a huge growth opportunity with an aggregate population of 530 million people.
Uber Freight recently expanded into Europe to continue serving SMEs. Freight remains a huge pain point for businesses and Uber offers efficiency improvements over traditional freight brokerage providers. Proceeds from the Uber IPO will help expand Uber Freight’s reach, which has grown to over $125 million in the fourth quarter of 2018.
The Bottom Line on IPO Investing
IPOs never have really been a license to print money, but as we see from both the Pinterest and Uber possibilities there are more caveats than ever when it comes to companies going public.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
