Early success doesn’t guarantee sustained gains for splashy initial public offerings, like that of Elon Musk's SpaceX, writes Ken Fisher.Jeenah Moon/Reuters
Got IPO fever? After the big debuts of SpaceX and Apotex Health Corp. – Canada’s biggest initial public offering in five years – appetites grow for other big private companies set to take their shares to the public: OpenAI, Anthropic, Databricks, Anduril and more. Many investors mull buying in to the thrall, envisaging riding flashy upstarts to riches.
Beware: Most IPOs flop − and even the initial winners often lack staying power. Don’t let their glitter blind you.
Today’s biggest IPO hype lies outside Canada. Yes, Apotex’s debut stirred spirits, with AGT Food and Ingredients, Cadillac Mines, Amapa Minerals and Lumina Metals also garnering headlines. But overall first-half Canadian IPO proceeds were $2.5-billion – peanuts compared with SpaceX’s record-setting US$86-billion June launch.
The real hype surrounds U.S.-based, tech-centric and AI-themed companies. Why? Sentiment toward tech and AI has run red-hot for many months. Founders and early investors want maximum benefit when selling stakes to the public. Enthusiasm juices prices.
The rub: Founders want to sell high − or get cheap capital. But IPO buyers want to buy low. Who likely knows more about a company’s true value? Add investment banks’ hype-filled marketing roadshows and the knowledge divide broadens. Hence what I wrote almost four decades ago in my 1987 book, The Wall Street Waltz: IPO actually stands for “It’s Probably Overpriced.”
Yes, some IPOs leap early − Apotex jumped by 58 per cent in its first month. But most stumble. Through July 10, AGT was down 23 per cent from its March IPO price. Lumina had sunk 26 per cent from its April offering.
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Early success doesn’t guarantee sustained gains. SpaceX roared 49 per cent above its IPO price after three trading days … then sank 23 per cent over the next three. On Wednesday, it sank below its offering price!
Nor are ties to AI plays a straight shot to riches. Norway’s Magnora Data Center ASA rode AI hype to massive IPO demand in June on the Euronext Growth Oslo exchange. That followed a private placement with share applications topping supply tenfold! It closed 12 per cent above its IPO price on its first day. It has sunk almost 20 per cent since.
This isn’t a forecast on any specific IPO – it is about the longer, broader history. For that, consider U.S. stocks: Since 1990, 52 per cent of newly listed firms lagged America’s S&P 500 their first month by a median 0.3 percentage point (ppt). Three months out, 60 per cent lagged by a median 5 ppts. Six months? 63 per cent lagged by 11 ppts. One and two years out, the lag rate nears 70 per cent, by 20 and 35 ppts, respectively. Ugly!
Time is usually your friend in stocks. Not in IPOs. Of the 48 per cent of U.S. IPOs that led in their first month, 56 per cent lagged a year out. So even if you love a company’s long-term prospects, you can normally buy shares cheaper later, after the IPO hype fades. Rushing in headlong early is foolishly unnecessary.
Huge name recognition doesn’t make today’s big IPOs surefire winners. Facebook was a tech titan before its 2012 IPO bellyflop. Ditto for Uber’s uber-underwhelming 2019 debut. Ask yourself: What do you know about these stocks others don’t? Anything?
Maybe you get lucky with one that booms. How fast will you sell? Usually, investors benefiting most are those allocated shares before the IPO debut. They pay the issue price but often can’t sell fast owing to lock-up rules.
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Today’s mega-IPOs sold shares privately to institutions, ETF providers and other private investors long before the IPO. Some to many are likely eager to cash in. Who leads that sellers’ cascade?
One-off IPO successes routinely breed overconfidence. Amid the dopamine rush, buyers assume it wasn’t luck but skill that delivered the high. More IPOs, please! But this increases the odds your returns suffer. History shows zero legendary investors as IPO buyers. Why you?
Moreover, can you grab enough shares in a hot IPO to be a game-changer for your portfolio? Unlikely. Demand for Apotex and Lumina shares both outstripped supply even after both upsized their initial IPO allotments. But if you can, another problem arises: Concentrated positions are incredibly risky. Successful investing takes diligence, wisdom, patience and discipline. It is a long journey not some get-rich-quick scheme.
Another warning: Hype comes before a fall. Huge IPO issuance can signal dangerous euphoria, teeing up a plunge in markets. While we aren’t broadly in euphoria yet, expectations for everything AI and U.S. tech are pretty frothy. Hence, firms’ lining up for IPOs. Elevated sentiment makes positive surprise harder to attain. That favours extreme caution.
Ignore the IPO hype. Emotions are never a good reason to invest.
Ken Fisher is the founder, executive chair and co-chief investment officer of Fisher Investments.