Following the hotly hyped debut of SpaceX in America and the booming Shanghai listing of Chinese semiconductor company ChangXin Memory Technologies (CXMT), initial public offerings are being eagerly anticipated globally. Many investors salivate over the possibility of buying into OpenAI, Anthropic, Databricks or Anduril early and riding the flashy upstarts to riches.
But that excitement offers a cautionary tale. For 40 years, I have said IPO actually stands for “it is probably overpriced”.
Current IPO hype surrounds firms that are primarily technology-centric and artificial intelligence-themed, with China and America the centres. Why? Sentiment towards technology stocks and AI has run hot for many months. Founders and early investors want maximum benefit when selling ownership stakes to the public. Enthusiasm juices prices, including the June 12 SpaceX debut, which, at more than twice the size, overtook Saudi Aramco's proceeds to become the biggest ever IPO.
The catch, however, is founders want to sell high, or get cheap capital, while IPO buyers want to buy low. Who knows more about a firm's true value? Add glitzy marketing roadshows from investment banks and the knowledge divide broadens. Hence, it is probably overpriced.
Fast risers, harder falls
Yes, some IPOs leap early, like CXMT's 466 per cent first-day moon shot, or Zhipu AI's dramatic run-up – though the Chinese AI firm's own debut was a modest pop, with the surge arriving over the following months. However, most stumble. Even those that leap often surrender all the early gains plus some. Consider SpaceX, which climbed as much as 67 per cent above its IPO price within its first few sessions, only to fall back below that $135 list price by July 16, just over a month after its debut. Shares have continued sliding since.
SpaceX is not unique. Norway's Magnora Data Center rode the AI hype to strong IPO demand in June on the Euronext Growth Oslo exchange, popping on debut before giving back those gains. Switzerland-based security company Verisure, which listed on Nasdaq Stockholm, was the largest European IPO in three years when it debuted last October. It rose on its first day but has since fallen roughly 31 per cent from its post-listing peak and now sits about 17 per cent below its list price. China's autonomous-driving firm WeRide, dual-listed in Hong Kong and on Nasdaq, trades at roughly half its IPO price.
Numbers don't lie
This is not a call on any specific listing; it is about IPOs' longer, broader history. If you consider US stocks, since 1990, 52 per cent of newly listed firms have lagged the broader market in their first month by a median of -0.3 percentage point. Three months out, 60 per cent lagged by a median of -5 percentage points. Six months from listing, 63 per cent lagged by -11 percentage points. One and two years out, the proportion lagging nears 70 per cent, by -20 and -35 percentage points, respectively. Ugly.
Even those that led early usually gave it back. Of the 48 per cent of US IPOs that led in their first month, 56 per cent lagged a year out. This means better times to buy are likely to come later, after the excitement fades.
Some may theorise that huge name recognition makes today's big IPOs sure-fire winners. But Facebook was a titan before its 2012 IPO flop. Uber repeated that in 2019. Widely watched and awaited, investors price in every conceivable growth story, elevating expectations.
-
Jubilant scenes during SpaceX's initial public offering at the Nasdaq MarketSite in New York, US. Bloomberg -
Elon Musk, founder and chief executive of SpaceX, speaks via video link before the ringing of opening bell at the Nasdaq stock exchange. AFP -
A SpaceX sign in New York. Bloomberg -
Maye Musk, mother of Elon Musk, during the company's IPO. Bloomberg -
People take photos of a SpaceX advert in New York City. Reuters -
Gwynne Shotwell, president of SpaceX, is joined by company executives as they ring the opening bell at the Nasdaq. AFP
Even those owning a booming IPO face a further problem: when to sell? Usually, investors benefiting most are those allocated shares before the IPO debut. They pay the issue price but often cannot sell fast, tied to lock-up rules.
One-off IPO successes also breed overconfidence. Amid the dopamine rush, buyers assume the joy is repeatable. More IPOs, please! However, history shows this increases the odds of poor returns.
Most investors also probably cannot buy enough shares to significantly affect their finances, especially when so many want in. That is for the best, considering the typical outcomes. But those who do get a lot of shares face the problem that concentrated positions are incredibly risky. Successful investing means diligence, wisdom, patience and discipline. It is a long journey, not some get-rich-quick scheme.
Hype before a fall
There is something all investors can glean from the current IPO hysteria. Hype comes before a fall. Massive IPO issuances can signal dangerous euphoria, teeing up a plunge. While we are not broadly in euphoria yet, expectations for everything AI and US technology-related are frothy. Hence, firms are lining up for IPOs. Elevated sentiment makes positive surprise harder to attain. That favours extreme caution.
Succumbing to the IPO hype is falling prey to greed. That is a major risk. Emotions are never a good reason to invest.
