Initial public offerings — they’re the ground floor for big-time profits. Right? Not so fast. IPO stocks can be a two-way street, even in a hot market like today’s. Let’s look at three recent high-profile initial public offerings and consider how to play them for a more secure and risk-adjusted outcome.
It has been a hot market this year and IPO stocks have seen great success as a result. With the major indices at record-setting highs there has been a groundswell of offerings as company’s cash-in during a friendly market environment. But it works both ways, right?
IPO’s also hold the promise for investors of being the next Apple (NASDAQ:AAPL) or Costco (NASDAQ:COST). Buying shares just as the stock enters life as publicly traded company seems like a great opportunity.
It’s not that easy though. The reality is most IPO’s won’t ever come close to the fantastical long-term returns of AAPL, COST and similar mega-caps whose tickers easily roll off our tongues. Still, there’s a chance. Isn’t there?
There’s also the truth that right here, right now and without passing judgment, some IPOs are dearly held. It’s also true that some of them are Wall Street’s version of a shiny new, must-have toy to own. But at the same time, other newly listed stocks appear ready for permanent exile to The Island of Misfit Toys.
With that in mind, here are three recent IPO stocks to keep an eye on:
IPO Stocks to Trade: Airbnb (ABNB)
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Source: Charts by TradingView
The first of our IPO stocks to trade is private-stay giant Airbnb. It’s a buy despite its current challenges — at least to a point.
ABNB stock has had its work cut out for it in 2020. This is no Zoom Video (NASDAQ:ZM) or Amazon (NASDAQ:AMZN) in a novel-coronavirus-driven environment. But despite the threats and expensive-looking price tag, ABNB has rallied.
Lockdowns and tough restrictions throughout the pandemic certainly haven’t helped Airbnb’s business model. That’s hardly a surprise. An undesirable trend of weaker urban rental markets as people pack their bags and head to the hills to work remotely has been another issue. And there’s more.
Airbnb also faces the underlying trust factor for the rental host, as well as would-be guests. That could be a significant problem from either party. Lastly, ABNB stock is no Hilton (NYSE:HLT), let alone a Booking.com (NASDAQ:BKNG) or Expedia (NASDAQ:EXPE) when it comes to value.
Ultimately, shares of this IPO stock currently have more questions than answers. And they’re pricey. But the best growth stories often find a way to remain at nosebleed multiples and defy skeptics while padding shareholders wallets as they grow into their earnings over time. ABNB stock looks like one of those situations.
Technically, I’d look to pick up exposure to ABNB on a shallower pullback. As a momentum play, a move towards $155 has trendline and Fibonacci support to help a low form. Any additional weakness puts the idea of a momentum strategy into question.
My Favored Strategy Here: Confirmed pullback low in conjunction with Feb $175/$190 Bull Call Spread.
C3.AI (AI)
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Source: Charts by TradingView
The next of our IPO stocks to trade is C3.AI. It’s also another industry giant that I’m looking for momentum to persist despite the warnings. AI stock is the only pure play artificial intelligence stock in the market today. And with early Oracle (NYSE:ORCL) exec and Salesforce (NYSE:CRM) pioneer Thomas Siebel at the helm, the company’s leadership is a proven commodity as well. Need I say more? Much like ABNB, there are obvious risks that aren’t going unnoticed and are receiving their share of attention.
Barron’s hailed AI stock as the market’s “Priciest Tech Stock.” Apparently, it has taken the top spot from another recent IPO, Snowflake (NYSE:SNOW). I’m less sure with AI shares fetching about 50x sales and valued at $11 billion versus roughly 200x and nearly $100 billion for SNOW. If nothing else, AI’s price chart looks like one where respecting the trend in motion could pay off.
Technically, given no signs that AI is anything other than a persistently bullish IPO stock to buy, purchasing strength rather than second-guessing simply “what is” or the “here and now,” makes sense. Specifically, I’d look to gain exposure on new highs as long as C3.AI’s determined uptrend remains intact.
My Favored Strategy Here: Jan $180/$200 Bull Call Spread.
DoorDash (DASH)
Source: Charts by TradingView
My final IPO stock to trade is DASH. And unlike ABNB and AI, DASH stock is delivering a short to the doorstep of bearish investors.
DoorDash has Wall Street universally worried. It’s not profitable and shares are expensive. That may actually sound like ABNB and AI. And for good reason too. Still, well-followed short-seller Citron Research went so far as to call DASH “the most ridiculous IPO of 2020.” And James Cramer warned his audience that it only has his blessing at $100 or less.
Even if those warnings prove overly bearish, a lack of customer stickiness, more reasonably priced competition from Uber (NYSE:UBER) and Grubhub (NYSE:GRUB) and potential government market oversight make this an IPO stock for the bear radar. And, technically, the price chart today agrees.
While our other IPO stocks have set new highs, DoorDash shares have traded lower and are now setting up for another down leg. A small bearish flag pattern set against the 50% – 62% retracement levels was confirmed Tuesday. I’d take the opportunity to position for new lows and only exit if shares muster the strength to break the flag’s high.
My Favored Strategy Here: Feb $140/$125 Bear Put Spread.
No Stocks owned: On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article. Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges.
The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
