In this podcast I will answer the question: Are Initial Public Offerings (IPO) a good investment?
An IPO is the first time a company sells its stock to the public on a stock exchange.
An Initial Public Offering (IPO) is the first time a company sells its stock to the public on a stock exchange. Besides being the first chance to own a cutting edge company, it can be exciting because there can be large price swings IPOs generate and can involve leading-edge companies. They can also be profitable for the issuing companies, investment banks and skilled traders. Long-term investors may not fare as well.
IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.
Here are the ten largest internet-related IPO’s, how they have performed through March 6, 2015.
Alibaba (BABA) was the largest US-listed initial public offering (IPO) raising $25 billion. Alibaba offers access to Chinese manufacturing. Small companies and individuals can have products produced inexpensively. It opened in September 2014 at $94/share. The value on March 6, 2015 was $84/share a 10% loss. The S&P 500 over that same period of time is up 3%. (underperformed S&P)
The Facebook (FB) social network company was initially offered at $38/share and in September, 2012 is trading for $80/share, up 110%. The S&P 500 over that same period of time is up 60%. The firm raised approximately $16 billion with the IPO. (outperformed S&P)
The Twitter (TWTR) IPO was offered in November, 2013 at $45/share. Twitter raised $1.8 billion, just surpassing Google and JD.com. In March, 2015, the value was $47/shares, a 4% increase. Over the same time period, the S&P 500 was up 19%. Twitter is a social media site allowing people to broadcast short comments. (underperformed S&P)
JD.com (JD), the Chinese online realtor, raised $1.8 billion from its IPO. JD.com was priced at $21/share and in March, 2015 was $29/share, a 37% gain. The S&P gained 9% over that same period. (outperformed S&P)
Google Inc. (GOOG) IPO raised $1.7 billon on August 18, 2004. GOOG famously set its IPO price through a “Dutch auction” in which interested investors placed bids at the price they were willing to pay. GOOG has increased over 1023%, far outpacing the S&P 500’s rise of 86%. The popular search engine has expanded its services to become the dominant internet content and advertising company. (outperformed S&P)
Yandex NV (YNDX) IPO raised $1.3 billion on May 23, 2011. YNDX has declined 56% from its offering price to March, 2015. The S&P 500 was up 56% for the period. YNDX, the prominent Russian search engine, has fared better than RENN, the Chinese firm that debuted in the same month. (underperformed S&P)
Infonet Services Corp., IPO on December 15, 1999, $1.1 billion raised. The data communications service provider was bought by British Telecom (BT) for $965 million in 2005, 4% less than was raised; the S&P 500 was also down 4% for the period. (performed the same as the S&P)
Shanda Games Ltd. (GAME), IPO on September 24, 2009, $1.04 billion raised. GAME has a total drop of 46%. The S&P 500 was up 99% during this period. (underperformed S&P)
Zynga Inc. (ZNGA) had an IPO on December 15, 2011 that raised $1 billion. ZNGA, which offers its online games primarily through Facebook, has dropped 72% since its opening, while the S&P 500 was up 70%. It is not clear whether ZNGA can maintain the popularity of its early games. (underperformed S&P)
Giant Interactive Group Inc. (GA), IPO on October 31, 2007, $887 million raised. In 2014, GA returned to private ownership. It had dropped 38% during this period, which the S&P 500 was up 36% during the same period. The Chinese online game company was trading below $8 in 2009 when Shanda had its IPO, which should have been a warning to Shanda investors. (underperformed S&P)
Other significant internet IPOs include:
Groupon Inc. (GRPN), IPO on November 3, 2011, $700 million raised. GRPN has decline of 70% since its IPO which S&P 500 is up 66% over the same period. (underperformed S&P)
LinkedIn (LNKD) had an IPO in May, 2011 and is up 188% since then, while the S&P 500 is up 56% during that period. (outperformed S&P)
Pandora (P) is up 14% since its June, 2011 IPO, while the S&P 500 is up 63% during that period. (underperformed S&P)
Amazon (AMZN) is up an amazing 25,285% since its IPO in April, 1997. The S&P 500 is up 134% during that period. (outperformed S&P)
Yahoo (YHOO) is up 3,437% since its 1996 IPO with the S&P 500 up 210% during that time. (outperformed S&P)
Compared to the S&P 500 over the same periods, these ten large internet IPO’s had six underperformed, one that moved with the market and three outperformed the market. Broader studies have found that the average IPO lagged the S&P 500 by significant margins over both its first year and first five years of trading.