I get a daily email from StockTwits, which is essentially Twitter for investors. It gives me a rundown of the day’s biggest investment-related headlines, at least from its over-caffeinated, Millennial-appeasing perspective. Lately, it’s included a whole lot about IPOs. On Monday, it highlighted two upcoming IPOs that we should be particularly excited about: Slack and Uber.
Two Hyped Upcoming IPOs
Slack is an instant messaging application designed specifically for the workplace (our entire Cabot Wealth team communicates on it throughout the day). It has over 10 million daily active users, did $400 million in sales last year, and is set to make its debut on the New York Stock Exchange very soon, at an expected valuation of $16.7 billion.
Uber, you’re probably more familiar with. It’s the peer-to-peer, technology-driven ride-sharing service that has essentially replaced taxicabs as the preferred mode of paid transportation in the U.S. According to StockTwits, the long-anticipated Uber IPO is coming later this year, at an expected IPO price between 44 and 50.
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Given how many people use them and how quickly they’re growing, it’s tempting to get as excited about these two high-profile upcoming IPOs as the breathless writers at StockTwits are. Don’t fall into that trap!
I’m not saying that Slack and Uber won’t eventually become very good investments. Chances are, they will. But the perils of pouncing on a stock the second it comes public simply aren’t worth it.
Consider the performance of two other recent IPOs of companies you’ve probably heard of.
Lyft (LYFT), Uber’s biggest competitor and closest comparable, is down 26% in the month since its Mach 29 IPO.
Levi Strauss (LEVI), the maker of the popular Levi’s jeans brand, came public on March 20. It’s up only slightly since.
Going back further, there are far bigger IPO cautionary tales of well-known companies:
- Twitter (TWTR) was down 26% in its first six months of trading after coming public in late 2013. In fact, the stock is still down from its much-hyped debut.
- Facebook (FB) famously struggled in its first year of public trading, falling as much as 50% from its IPO price. The stock was not a profitable investment until 16 months after its May 2012 debut.
- Few market debuts have been more hyped than the Snapchat IPO in February 2017. But Snap, Inc. (SNAP) was doomed from the start, falling 27% in its first month of trading. More than two years later, SNAP stock is down 58% from its IPO price.
What did those wayward IPOs have in common? They involved popular companies that were showered with way too much hype before coming public, thus over-inflating their value from the get-go. The results since have been mixed—TWTR is up 30% since its initial six-month crash, Facebook has become one of the market’s great growth stocks after those early growing pains, and SNAP has been a complete disaster.
Lyft and Levi Strauss may well bounce back in the coming months. But right now, they’re experiencing some typical post-IPO growing pains while the market figures out exactly how to value the two companies.
The Problem with IPOs
And that’s the inherent problem with IPOs: you never know how Wall Street is going to receive new stocks. At Cabot, we like to see Story, Numbers and Chart (coined “SNaC” by our former analyst Paul Goodwin) to fully buy into a stock—a combination of a good story, good growth numbers and a good chart make for the best stocks. But IPOs don’t have a chart; there’s no trend to evaluate.
So, we uniformly advise staying away from IPOs. Tim Lutts, our CEO and Chief Investment Analyst, recommends waiting four months before investing in any new public company.
And the more hyped the IPO, the more likely it is to come crashing back to Earth. Just ask anyone who bought early on FB, TWTR or (especially) SNAP.
The list of upcoming IPOs may be star-studded and exciting. But the best thing to do is wait until the hype subsides and the companies’ substance is all that matters to investors.
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