The Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) IPOs were two of the largest, most anticipated IPOs in recent memory. Yet both Uber stock and Lyft stock have flopped so far this year. Early investors have gotten burned, but the least they can do is learn from their mistakes.
It’s no coincidence that overly hyped tech IPOs perform poorly out of the gates. If you’re among the group of buyers who got burned by Uber stock, make sure you stay away from the Palantir IPO, the Slack IPO and the Airbnb IPO.
Recognize the Pattern
I warned people not to buy Uber stock. I warned people not to buy Lyft stock. Going all the way back to 2017, I warned people not to buy Snap (NASDAQ: SNAP) stock. The Uber IPO and other big tech IPOs share a set of traits that make them extremely risky bets. The same pattern plays out over and over again.
Investors recognize these companies’ brands and are excited about their products. The media hypes the IPOs. Investors buy the stock on its first day of trading in an attempt to “get in early.” Finally, the stock spends at least its first six months dropping.
Here’s the reality. When you buy a big tech IPO like the Snap IPO, Uber IPO, or Airbnb IPO, you are not getting in early. If Airbnb goes public this year. it will be valued at up to $38 billion Airbnb was founded in 2008. Investors who buy Airbnb stock aren’t getting in on that first decade of extreme growth that got the company to the $38 billion valuation. In fact, they are actually enabling the investors who really did get in early to cash out.
What Happened to Uber Stock?
To understand why these IPOs are dubious investments, just take a closer look at the process of going public. Nobody is forcing these companies to go public. So why do they do it?
“If you think about it, any company will wait (to launch an IPO) for the moment when they believe they can get the highest price,” Commonwealth Financial Network chief investment officer Brad McMillan recently said.
Discussing Uber stock, investing legend Warren Buffett was unenthusiastic about the recent wave of high-profile IPOs in an interview with CNBC. Buffett said he didn’t ever recall investing in an IPO.
“The idea of saying that the best place in the world I can put my money is something where all the selling incentives are there, commissions are higher, the animal spirits…that’s going to be better than a thousand other things I can buy where there is no similar selling enthusiasm and the desire to get the deal done and the extra commissions…That’s the single best thing to buy on a given day?” Buffett said.
In other words, when company insiders think their company is fully valued, they choose to go public.
“In almost all cases, insiders and professional investors – with assistance from Wall Street’s smooth-talking salespeople – are foisting overpriced dreck on the public,” former Kase Capital Management hedge fund manager Whitney Tilson says.
A Better Approach to Tech IPOs
It’s understandable why investors would get excited about Airbnb stock, considering the company may have decades of growth ahead. But instead of getting caught up in the Airbnb IPO hype, long-term investors should take a more long-term approach.
According to Reuters, eight of the 10 largest tech IPOs in history delivered negative returns of between -25% and -71% in the year following their first day of trading. In addition to the potential for overpriced IPOs, disappointing earnings reports and lock-up expirations tend to weigh on tech stocks in their first year of trading.
The first year of trading after IPOs will likely be the most noisy, risky and unpredictable year of all for investors. Why even put yourself through that? There’s a good chance, given the history of IPOs, that you’ll be able to buy the stock cheaper a year later. If not, you’ve only missed out on a year of gains. Do you think investors who bought Amazon (NASDAQ: AMZN) or Netflix (NASDAQ: NFLX) one year after their IPOs are complaining about their gains at this point?
If a big tech IPO really is worth buying and holding in the long-term, it’s worth waiting for. At the very least, waiting six months or a year to buy will give investors a couple of earnings reports to digest. It will also give them a better sense of how the market will value the company’s business.
The debate over the Palantir IPO, the Slack IPO, the Airbnb IPO and other big tech IPOs will only get more heated as they approach. Investors should do themselves a favor and ignore the hype. It may feel like they’re missing out on the excitement. But just ask early Uber stock investors how exciting the past couple of months have been for them and if they’re happy about the current Uber stock price.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.