A few months ago, billionaire investor Mark Cuban warned about a tech bubble that he said was worse than 2000. Others have shared similar thoughts, and much of the focus has been on so-called “unicorns” — privately held companies that have extremely high valuations.
We often see these companies go public, and yet many of them aren’t even making money.
So what’s going on here? Why are so many companies debuting onto the U.S. stock market with these valuations? And what does this mean for individual investors who want to invest in the next big IPO?
My panel and I recently discussed this on my Fox Business show, Making Money with Charles Payne, and I thought you would be interested in it as well.
Let’s look at Etsy Inc (NASDAQ:ETSY) for example, which made its debut on April 16. The IPO priced at $16, yet it opened for trading that day at $31, so the market valuation jumped immediately from about $1.8 billion to $3.5 billion.
Etsy is a household name in many places around the world. It’s a marketplace for people to buy and sell unique goods. Because many people use it, there was a line of people waiting to buy the stock when it debuted. When the share price spiked to a high of $35.74 on that first day of trading, a lot of folks bought at elevated prices.
Now look at where the stock is trading today — just over $17. All of those people that bought ETSY that first day of trading are getting crushed.
The same thing could happen when other companies go public, like Uber. People will be lined up no matter the share price or valuation — many of them probably won’t even know what the valuation is at all — just because they know the name.
So should you avoid IPOs?
Yes and no.
I do think the risks right now for these unicorns are too high for the average investor to buy them on their IPO day. We all remember the Facebook Inc (NASDAQ:FB) disaster. Be careful, do your homework and make sure that you understand the risks you’re undertaking.
And if it’s a stock you like, you may want to wait it out for a few weeks or months and let the hype fade.
Also, if you’re going to make this kind of investment — buying into the most-hyped IPOs — make sure you’re only investing money that you can afford to be down on, at least at first. I’m not saying you’d lose that money, but you may not be profitable right away.
Think of it this way: If you opened a pizzeria in New York City and had to sell it two days later, you’d most likely only get half of the money you put into it. That’s why it also helps to be in it for the long haul.
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