Dropbox and Spotify, two widely used and high-profile Internet-based companies, are set to come public. Dropbox filed its initial public offering papers this week; Spotify won’t hold a traditional IPO, but plans to list on the New York Stock Exchange soon. Judging by the fates of similar tech IPOs in the past few years, I wouldn’t go near either of them.
The list of overhyped tech IPOs that have come crashing back to earth since coming public grows reads like a who’s who in today’s tech world.
Twitter (TWTR): -14% since 2013 IPO
Fitbit (FIT): -83% since 2015 IPO
GoPro (GPRO): -84% since 2014 IPO
Snap Inc. (SNAP): -34% in a year
All these tech companies generated tons of excitement among institutional investors in the weeks and months leading up to their IPOs. As a result, their IPOs were priced either at the high end of their expected ranges, or higher than the range. And with no profits, every one of them was overvalued as soon as they came public. Once the initial fervor subsided, it didn’t take long for Wall Street to figure that out. Even years later in some cases, none of those tech stocks have recovered.
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That’s not to say Dropbox and Spotify are doomed to be bad stocks. They’re just not likely to be good investments if you try and get in super early—like the first few days of trading. It’s tempting to see the huge run-up in a stock whose product you know, use and love, and decide it might be worth joining the party. But most high-profile IPOs, especially tech IPOs, burst out of the gates. The real litmus test comes months later, when the reality of an earnings report or two sets in, lockup agreements have expired (meaning early insiders can sell their shares) and all the front-page headlines disappear.
Even Facebook (FB) famously stumbled in its first year of trading, falling 50% below its IPO price thanks to an unsustainable early valuation. Facebook stock didn’t get back above its 36 IPO price until more than a year after its May 2012 debut.
Perhaps Dropbox or Spotify will have a similar trajectory. But chances are both will struggle in their first six months. Both have red flags: Dropbox, a cloud storage company that allows people to share files in an online “box,” is on track for one of the largest tech IPOs in recent years. Meanwhile, Spotify, a popular music-sharing app, is bypassing the initial public offering process, which should save the company about $65 million in underwriting fees but will make Spotify stock wildly unpredictable when it does come public.
Those don’t sound like recipes for bucking the recent trend in wayward tech IPOs!
Thus, you’re better off waiting a few months—perhaps after an earnings report or two—before deciding to invest in either stock. What’s the rush? There are plenty of other good tech stocks out there with the chance for huge profit potential. They’re easy to identify because, unlike the four tech IPO flops mentioned earlier, they have nice-looking stock charts.
Let other investors get caught up in the Dropbox and Spotify excitement. As we always say, patience pays when it comes to growth investing. That applies to IPOs too.
At Cabot Growth Investor, we always look for the fastest-growing stocks and tell you exactly when to buy to maximize your profit potential. Just last year, our portfolio outperformed the S&P 500 by 100% and with our market timing indicators flashing green light, we see many profit opportunities in the weeks and months to come.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More