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The Red Hot IPO Market May Burn You

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The 2020 IPO market is red hot this month, as retail investors take on an aggressive investing approach. There seems to be endless risk-on appetite driven by young trader/investors who want to get on the ground floor of hot new stocks as the wind in blue chips' sails seems to be dying down.

The Renaissance IPO ETF (IPO - Free Report) has surged 23% year-to-date, pushing the innovation-driven ETF to all-time highs. This ETF's holdings are primarily made up of 2018 and 2019 IPOs, but we are beginning to see more 2020 IPOs join the ranks as the fund phases out 2018 debuted stocks.

Enterprises are seeing this as an opportunistic time to raise public funding, with investors hunting for fresh new stocks. Nikola Motor (NKLA - Free Report) is one such example, although they entered the market in a very peculiar way. The stock had initially traded under VectorIQ (VTIQU), but Nikola merged with the firm on June 2nd and debuted the new NKLA shares on June 4th. Since the merger, the shares have skyrocketed over 150%.

Nikola is an electric vehicle company that is yet to sell a single vehicle and has made exactly $0 in sales. Still, highly speculative investors & traders have pushed this enterprise to a valuation of roughly $29 billion. This puts the copmany's value at the same level as Ford Motor Co. (F), the automobile pioneer that has been selling vehicles for over a century. VRM released its shares on Tuesday, June 9th, with extraordinary success. The ecommerce oriented used-car dealer lost $143 million in 2019 and $41 million in its first quarter of 2020, both of which are loss expansions from the previous year. Still, the company was able to raise its IPO price range twice until it eventually came to $22 a share, and when it hit the public exchanges, the stock soared 118% on the first day of trading.

Warner Music Group (WMG - Free Report) was another big June IPO, with these shares hitting the markets on Wednesday, June 3rd. Its IPO was priced at $25 per share, but it quickly ripped past that. IPO enthusiasts have pushed the record label entertainment conglomerate up to over $32 per share (up 30% in just over a week).

ZoomInfo (ZI - Free Report) is the final June IPO rocket that I will discuss. ZoomInfo is an intelligent go-to-market platform that shortens sales cycles and increases win rates for marketers and sales teams. The company grew its topline by over 100% in 2019 but posted a more extensive loss of $84.5 million this past fiscal year. Despite the uncertainty surrounding this business, ZI shares have zoomed up over 62% this week, and momentum remains with its stock price ripping almost 20% today alone. ZoomInfo is currently being valued at $23.5 billion.

Should You Place Any Bets?

Of this month's IPOs, ZoomInfo is the one I have my eye on because of its unique cloud niche and its enormous addressable market. Still, I am a patient man and will wait till the market froth is blown off the top.

These companies saw an opportunity to get their shares out to the public while the markets are aggressively risk-on. This was an intelligent business move as they were able to raise a healthy amount of money at rich valuations, despite the recession in which we currently find ourselves.

There is an enormous amount of money flooding into the markets from retail investors who are feeling the FOMO of the crazy rally we've seen in the past few months. 

The markets are immensely overbought, according to technical indicators. I would be cautious with putting money into these June IPOs until sensibility can bring this market back down to realistic levels.

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