IPOs May be Poised for a Banner Year – Then Again, May be Not
Anticipating lower interest rates and a smattering of high-profile companies poised to go public, some pundits and investors began touting 2024 as the comeback year for IPOs. However, here we are in late April and only 58 IPOs have come to market. That is the same number as this time last year.
Still, with brands such as Reddit, Panera Bread, Skims, Stripe, Birkenstock Holdings, and more launching or contemplating IPOs – this could be a big year.
Then again, the Federal Reserve Bank’s reluctance to cut interest rates, regulatory changes, and a poor performance history may all hold IPOs back.
What is an IPO
An IPO (Initial Public Offering) is a way for private companies to become listed on a stock exchange and become publicly traded. The process of launching an IPO involves regulatory review by the Securities and Exchange Commission (SEC). That is followed by underwriters, picked by the company, evaluating the IPO prospects and setting an opening price for the stock. After all that, the stock is open for trading and, hopefully for the company, raising operating capital and the stock’s price.
What is the Allure of IPOs
The draw of IPOs for many investors is an opportunity to get rich quickly.
If you acquire stock in an IPO at the offer price and the opening price is higher – you can sell for a fast profit. However, many investors view IPOs as a way to get in early on a good long-term investment. For example, Facebook (Meta Platforms) went public in 2012 at $38 a share. At the market close Monday, the share price was $481.73.
However, for every Meta, there have been many failures. One of the most dramatic was Pets.com. The online pet store featured an irreverent sock puppet dog as its spokes (person, puppet, sock?) that gained its following. As a result, the 1999 Macy’s Thanksgiving parade featured a balloon replica of the spokes thing.
(Pets.com also sued Triumph, the Insult Comic Dog. The later sock puppet canine was a staple of Conan O’Brien’s late night tv show – but that is another story.)
Although Pets.com had an award-winning advertising campaign, it had a flawed business plan. As a result, the company posted losses every month of its existence.
The stock opened at $11 a share raising $82.5 million in January 2000. However, by November of that year, the stock was sitting at 19 cents and the company folded.
The SPAC Effect
More than 6,000 companies have gone public through IPOs since 2000. The watershed year was 2021. That year 1,035 companies went public through IPOs – a record that still stands. The previous record set the year before was 480.
One element that led to the IPO surge in 2021 was the use of special purpose acquisition companies – SPACs. Of the 1,035 IPOs that year, over 700 were issued through SPACs.
New SPAC Ruling
If Seinfeld was a TV “show about nothing” – SPACs are the Seinfeld of investing.
Typically SPACs are publicly traded companies without any real business operations or assets. These companies are formed to raise money to merge with private companies.
Public companies wanting to go public were quickly drawn to SPACs. That is because SPAC mergers required less regulatory review. That made for a faster SEC approval than traditional IPOs. It also provided less information to investors.
The SEC moved to shore up the lack of investor protections in SPACs in a January 24th decision. That vote now requires SPACs to provide more financial information as well as disclose conflicts of interest. However, those rules do not go into effect until July 1.
SEC Chair Gary Gensler said, “these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.”
Star SPACled Bummer
Investors were drawn to SPACs because a merger with the right company could produce a hefty profit. The idea became so fashionable that celebrities began forming or joining the boards of SPACs. Some of those celebrities include basketball star Stephen Curry, rapper Jay-Z, and even Martha Stewart.
With all the hype, investments in SPACs swelled like hot air in a balloon. However, the SPAC bubble has not burst so much as it has deflated.
Of SPACs that went public in 2020 and 2021, J. P. Morgan found that 90 percent had negative returns. As a result of such poor performance and the new regulatory safeguards, these shell companies are not likely to figure in many future IPOs.
Looking Ahead
So what does the future offer for IPOs?
A perfect storm of sorts may be brewing for IPOs. However, most will probably forego the SPAC route due to regulatory changes and the dismal performance noted above.
Many investors became risk-averse following the economic upheaval of the pandemic. That has resulted in more cash on hand for investment. That has created an opportunity for companies going public to attract more funds.
For investors, many of the companies going public or considering it in 2024 are well-established brands. Companies with years of profits and tangible assets are more likely to continue their profitability than newer companies without a track record.
Should You Invest in IPOs?
The draw of IPOs is the chance to get into an investment at its lowest price and hopefully watch the stock price take off. Investment lore is populated with stories of investors who bought a stock at a low price and rode its performance to riches. (For example, Ty Cobb did not become a millionaire by playing baseball. He became a millionaire because he bought Coca-Cola at 9 cents a share.)
However, retail investors do not get the first shot at an IPO. That privilege is reserved for accredited investors and institutions such as large banks, insurance companies, and pension funds.
Investing in an IPO boils down to doing the same due diligence you should do on any investment. However, guessing the future performance of the company going public is also a large part of the equation.
Betting on IPOs is not the safe and disciplined way to build your financial future. However, If you see potential for a company going public and can afford to lose what you invest – an IPO might be the right play for you.
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