An IPO (initial public offering) is a great day for company’s founders, early investors, company employees and investment bankers – they usually walk away with millions upon millions of dollars at the close of the market day. All too often however it is not so great for individual investors who are at the very bottom of the IPO wealth food chain and often play the fool.
Don’t be the sucker who buys shares of a new company on day one, the risk is not worth the bragging rights. It might be a good rule of thumb to wait a year or so, watching the company’s earnings and stock performance before you pull the trigger and adding it to your portfolio.
Reason to Wait
For every Godaddy (GDDY), Google (GOOG) or Facebook (FB) there are horror stories like Zynga (ZNGA), Etsy (ETSY), Shake Shack (SHAK) and now most likely SNAP (SNAP). Yes, you could miss out on some phenomenal gains by sitting on the sidelines for a year but you could also protect yourself from absolute portfolio decimation. Be a patient investor, if a company is a quality company it will still grow and its stock will still rise after a year.
If an investor just waited a year before investing in all of the above stocks all their trades would have at least been profitable, even in loser stocks like Shake Shack, Etsy and Zynga. Yes in Google and Godaddy you would have lost out on some gains, but so what? Look at that 559% return in Google after waiting a year, who in their right mind wouldn’t take that? Also a 30% gain in Godaddy after only 14 months is nothing less than outstanding!
The most recent flashy IPO has been Snap Inc (SNAP) which debuted on March 2, 2017. The shares were listed at $17, but that price was not for regular public investors like you and I. The public had to buy the shares at the opening price of $24 on the first day. SNAP shares closed just above $27 the following day have declined every day since then. Yesterday SNAP had an intraday low of $17/share, retreating to its IPO price. SNAP hasn’t closed above $24/share since March 6, 2017, two days after its IPO. Ouch!
If you ask me the odds are high Snap’s stock price will keep trending down and down and down some more. The company wasn’t even profitable at its IPO, it has lost over $500 million in the prior year. Snap also faces stiff competition from Facebook’s Instagram. This is definitely shaping up to be a scenario where Joe Public should have snapped his wallet closed and stayed out of the fray.
In nine months we will see if I’m right or wrong about SNAP, but if history is any guide I’ll be right. In the meantime don’t play the sucker, stay away from IPOs.