The Initial Public Offerings (IPO) are increasing in the United States, despite the pandemic. According to Stock Analysis, about 373 companies have gone public through IPOs this year – the highest figure since 2000. Hundreds of other companies have gone public using Special Purpose Acquisition Companies (SPACS) and direct listings.
Among the most notable companies that have IPOed this year are Snowflake (SNOW), FuboTV (FUBO), and Corsair Gaming. In this IPO investing guide, we look at the best way to approach companies that are going public.
Identify companies going public using an IPO calendar
The first thing you need to do when investing during an IPO is find the companies that are going public. You can do this using an IPO calendar, which is a feature provided by many free online platforms like MarketWatch, Investing.com, and Webull.
The benefit of using these calendars is that they help you identify opportunities early enough. This is because, in most cases, financial media platforms like Bloomberg, Financial Times, and CNBC mostly focus on big companies like DoorDash, Uber, and WeWork. Other small and often non-controversial companies rarely make headlines. The screenshot below shows a list of recently priced, upcoming, future, and withdrawn IPOs from MarketWatch.
The most important information in an earnings calendar is the name of the firm and the ticker, the price range, shares being offered, and the exact date of the IPO.
Read more about the company
Unlike day traders, long-term investors want to know more about the companies going public — fortunately, all American companies going public need to submit loads of documents before their door-ringing event. The most important document is known as the prospectus or the S1.
The S1 document, which is often more than 100 pages, contains several important pieces of information about the firm. It describes the nature of the firm, its registered business address, the potential risks to its business, use of proceeds, executive compensation, and explanation of non-GAAP numbers. With this information, investors can know whether this is a good company to invest in or not.
For example, in 2019, WeWork withdrew its IPO because of the information in its S1 document. Before it released its prospectus, the firm was valued at more than $40 billion in the private market. However, the prospectus showed that the firm had made a net loss of close to $1 billion in the first six months of the year, as shown below.
Look at the bigger picture
Next, for any company going public through an IPO, it is important that you look at the bigger picture before you invest. To do this, you should look at the prospectus and investigate the important claims made by the company.
For example, if the company talks about the total addressable market (TAM) it is targeting, investigate whether the facts make sense. For example, in its prospectus, WeWork said that the TAM it was targeting was more than $945 billion. Most analysts believed that that estimation was wrong.
When looking at the bigger picture, look at the company’s key competitors and how they are doing. Also, look at its top-line growth and the key segments of its expenses before you invest. Doing this will help you see whether a company makes a good investment or not.
Companies are not the same
When investing in companies going public, you need to understand that companies are not the same. For example, highly-anticipated IPOs like DoorDash and Snowflake will typically do better than traditional companies like Miniso (retailer) and Abcam, a protein distributor. Investors will always look at different things when valuing companies going public.
For example, for traditional companies like retailers, investors will want to see how profitable they are and the overall state of their balance sheet. On the other hand, for fast-growing technology companies, investors rarely focus on profitability. Instead, they mostly focus on how fast these companies are growing their revenue.
A good example of this is Snowflake, a cloud computing company that counted Warren Buffett as an investor. The company had priced its IPO at $120 per share. However, the stock opened at $245, valuing the company at more than $65 billion. That is a hefty valuation for a company that generated more than $264 million in the fiscal year 2020. It lost more than $348 million in this period.
Snowflake IPO prospectus
For technology companies like Snowflake, Asana, Zoom, and Slack, investors look at their revenue growth and the scale of their market share. For example, Snowflake is a fast-growing company in a fast-growing cloud warehousing sector and has a substantial market share.
IPO lockup expiration
IPO lockup expiration is an important thing you need to watch when investing in an IPO. Ideally, when firms go public, there are regulations about how soon insiders can exit their positions. In the United States, this period is usually 180 days.
The goal of this policy is to cushion retail investors from investing in companies with no insider ownership. Another goal is to ensure that the company’s share price is stable. For one, if insiders started exiting, it would mean that they don’t have confidence in the company.
In certain times, share prices of recently-public companies tend to drop as investors wait for the lock-up period expiration. Ideally, we recommend that you wait for this period before you invest in such companies.
Fortunately, tracking companies whose lockup is about to expire is relatively easy. There are several free platforms that offer these services. The most advanced one is by MarketBeat, which is shown below.
Lockup expiration calendar
A lockup expiry platform has the name of the company and the ticker, current share price, expiration date, the number of shares issued, and the IPO price.
Shopify & Facebook stocks after IPO
Investing during an IPO can be extremely rewarding. For example, investors who bought Shopify’s stock during its IPO in 2015 have made more than 4,000x return. Similarly, as shown above, those who invested in Facebook have grown their returns by more than 624%. However, those who invested in companies like LendingClub and GoPro have lost money. Therefore, you need to take time and analyze the future of a company before you invest in it.