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IPO = It's Probably Overpriced | Stock Market Advice
IPO’s were an especially hot topic of investment chatter in the wake of Facebook’s offering debacle. At the time of its IPO, I warned that, although it is possible for Facebook to achieve the necessary growth in revenues and profits to justify its initial evaluation, that seems unlikely to me. The company would have to do just about everything right for quite a long time. This brings me to IPO’s in general.
My personal view is that IPO’s are often a “rigged game” designed to benefit the investment banks and some of their institutional investor friends. There is substantial academic research showing that the majority of IPO’s do not perform well for several years after the initial price surge following the offering—and Facebook didn’t even make it beyond the first day before fading.
Facebook is just one high-profile example: other highly-recognizable tech sector IPO’s trading below their initial price include Pandora Media (P) and Groupon (GRPN). Pandora’s revenue growth quickly dissipated while Groupon has stumbled dramatically with profit concerns. Our own “back of the envelope” research shows that roughly 56% of the stocks that have gone public since the beginning of 2009 are currently trading below their IPO price, even though the S&P 500 is up more than 45% since January 1, 2009. Rather than buying the stock of an untested company that is trading on the hype surrounding an IPO, we prefer to wait until the company has developed a decent track record and cheap valuations.