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Can the IPO Market Produce New Leaders? 3 Attributes to Look For
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IPOs, the Lifeblood of the Stock Market
Initial Public Offerings (IPOs) are the lifeblood of the stock market. Companies that opt to go public reap the benefits of cheaper access to capital, the ability to attract top-tier employees, and a more diverse shareholder base. Though older companies may provide more stability, newly public companies often offer investors innovative products and services, an opportunity to invest earlier in the company’s trajectory, and faster growth.
Image Source: Zacks Investment Research
Pictured: IPOs like Alphabet GOOGLproduced some of the biggest returns in recent decades.
Unfortunately, in 2022, the number of firms going public plummeted due to higher interest rates, inflation, and a risk-off environment. However, in the past few years, several of America’s most innovative companies have debuted, including ridesharing giant Lyft Inc (LYFT - Free Report) , the trendy coffee chain Dutch Bros Inc (BROS - Free Report) , and short-term homestay operator Airbnb (ABNB - Free Report) .
Keep your Eye on the Ball
All three of the stocks mentioned above sport double-digit EPS and revenue growth, were profitable last year, and have tremendous liquidity and institutional backers. Nevertheless, all three are down since coming public in the past few years.
Image Source: Zacks Investment Research
Picutred: Big name IPOs like LYFT, ABNB, and BROS are down since going public
Should investors give up? To answer this question, it is helpful to look at two past true market leaders over the past 15 years. While history does not always repeat itself, it does tend to rhyme. Despite recent pullbacks in the stocks, Meta Platforms Inc (META) and Tesla Inc (TSLA) are some of the strongest performers since inception. What do the two have in common? Both took more than a year to begin trending above their IPO prices.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Stocks sometimes take time to take off because of factors such as:
· Exit liquidity: Some early investors use the liquidity of going public to exit shares, thus increasing supply.
· Supply/Demand Equilibrium: Since going IPOing is not a perfect science, it usually takes time for the stock to find the proper supply/demand equilibrium.
· Market Environment: Most stocks follow the direction of the market. For example, in 2022, the S&P 500 struggled. Therefore, most of the underlying stocks did as well.
Because of the above reasons, it is too early to give up on these stocks.
What Should I look for?
1. Trend Change:The first signal that a stock’s trend is changing is a price move back above the 200-day moving average.
2. A Massive Price Gap on Volume: In 2013, Tesla and Meta started their price moves with a bang. Tesla gapped higher by 16% on volume 570% above the norm, while Meta launched higher by 30% on volume 750% higher than the norm.
3. Rising Consensus Estimates: Like any stock, the magic ingredient for IPOs is rising consensus estimates. (You can use Zacks.com to track this)
Conclusion
Recently, the IPO market has been frustrating for investors. However, by studying history, one finds that it sometimes takes time before IPOs become true market leaders due to exit liquidity, supply/demand equilibrium, and the market environment. Investors should monitor recent IPOs for trend changes, price gaps on volume, and rising consensus estimates to catch the next big winners.
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Can the IPO Market Produce New Leaders? 3 Attributes to Look For
IPOs, the Lifeblood of the Stock Market
Initial Public Offerings (IPOs) are the lifeblood of the stock market. Companies that opt to go public reap the benefits of cheaper access to capital, the ability to attract top-tier employees, and a more diverse shareholder base. Though older companies may provide more stability, newly public companies often offer investors innovative products and services, an opportunity to invest earlier in the company’s trajectory, and faster growth.
Image Source: Zacks Investment Research
Pictured: IPOs like Alphabet GOOGL produced some of the biggest returns in recent decades.
Unfortunately, in 2022, the number of firms going public plummeted due to higher interest rates, inflation, and a risk-off environment. However, in the past few years, several of America’s most innovative companies have debuted, including ridesharing giant Lyft Inc (LYFT - Free Report) , the trendy coffee chain Dutch Bros Inc (BROS - Free Report) , and short-term homestay operator Airbnb (ABNB - Free Report) .
Keep your Eye on the Ball
All three of the stocks mentioned above sport double-digit EPS and revenue growth, were profitable last year, and have tremendous liquidity and institutional backers. Nevertheless, all three are down since coming public in the past few years.
Image Source: Zacks Investment Research
Picutred: Big name IPOs like LYFT, ABNB, and BROS are down since going public
Should investors give up? To answer this question, it is helpful to look at two past true market leaders over the past 15 years. While history does not always repeat itself, it does tend to rhyme. Despite recent pullbacks in the stocks, Meta Platforms Inc (META) and Tesla Inc (TSLA) are some of the strongest performers since inception. What do the two have in common? Both took more than a year to begin trending above their IPO prices.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Stocks sometimes take time to take off because of factors such as:
· Exit liquidity: Some early investors use the liquidity of going public to exit shares, thus increasing supply.
· Supply/Demand Equilibrium: Since going IPOing is not a perfect science, it usually takes time for the stock to find the proper supply/demand equilibrium.
· Market Environment: Most stocks follow the direction of the market. For example, in 2022, the S&P 500 struggled. Therefore, most of the underlying stocks did as well.
Because of the above reasons, it is too early to give up on these stocks.
What Should I look for?
1. Trend Change:The first signal that a stock’s trend is changing is a price move back above the 200-day moving average.
2. A Massive Price Gap on Volume: In 2013, Tesla and Meta started their price moves with a bang. Tesla gapped higher by 16% on volume 570% above the norm, while Meta launched higher by 30% on volume 750% higher than the norm.
3. Rising Consensus Estimates: Like any stock, the magic ingredient for IPOs is rising consensus estimates. (You can use Zacks.com to track this)
Conclusion
Recently, the IPO market has been frustrating for investors. However, by studying history, one finds that it sometimes takes time before IPOs become true market leaders due to exit liquidity, supply/demand equilibrium, and the market environment. Investors should monitor recent IPOs for trend changes, price gaps on volume, and rising consensus estimates to catch the next big winners.