IPOs
We’ve had a surprisingly large amount of client interest in 2019 having to do with the IPO market. That’s probably a good thing that people are interested in stocks becoming public. However, there’s an underlying fear of whether this is like 1999 and 2000 when we had the “.com bubble.” Our Portfolio Team has found some good research that shows this is very different from that era. This research includes the findings of Jay Ritter who’s an expert in IPOs at the University of Florida. He makes excellent fundamental points about how different the “.com era” looked during 1999 to 2000, in a time in which 547 companies went public through IPOs. What was different about those companies then the ones now?
Average Sale Size
There are two main fundamental points Jay Ritter points out. The first point he makes is regarding the average sale size of the company going public today in 2019. It is $173.6 million. Back in the “.com era” it was only $12 million. This number has grown exponentially. Those companies were a lot smaller and this number represents over 10 times the scale it was during that era. With that sales size, the business concept has been monetized and a lot more proven.
Age of Companies
The second one is the age of the company. In the “.com era” you would see people who were extremely young that had companies that hadn’t been around for long. The average age of a company in the “.com era” was 4 to 5 years. The average now, in 2019, is 12 years. It used to feel like you would hear about some of these companies from the sole fact of them becoming public. Now, these companies have been around for years and we believe they have become well known to the consumer before becoming public. A lot of them are household names with a proven business practice.
Evaluation
What you always have to do when you’re evaluating IPOs is to keep in mind that this is still a high risk category. You need to look at them on an individual and case-by-case basis. What’s the business model? What type of management does this company have? What does the balance sheet look like? What does the income statement look like? In general, and by no means are we making a recommendation, but, we would say you would have less risk as a category now than you did then there because of these company’s sales size and average daily business. Even though these are older, bigger companies, they are still unproven in terms of public market companies. A lot of them are burning through what we call the “cash burn”. They have a lot of assets and a lot of sales but still not making money. So, while it’s not as risky as it was 1999 and 2000, there’s still a lot of risk in the IPO Market.
Individual Investor
What would also be interesting to see is the individual investor coming back to individual equities. Index funds are not able to buy these IPOs because there’s no track record. If you think you’re getting a piece of one of these large companies because you have an index fund, you’re not, so will this bring back the excitement to individual investor? Like we saw last Friday, there was a ton of energy in the market. We saw our own clients call us about this which, in a way, shows us proof of consumer energy, which is great for the stock market. If individuals are coming back, that increases demand and could potentially push all the boats higher during the rising tide. This is definitely something we’re watching very closely. We believe it could be potentially impactful.
Ashley Page, JD, MBA
Senior Vice President
Wealth Consultant
Email Ashley Page here
Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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