From Kiplinger · · 1m 40s
IPOs: Pros, Cons, and How to Invest
How to spot a winning IPO before buying.
In brief
How to spot a winning IPO before buying. Investing in IPOs can offer growth but carries risks; evaluate revenue, management, and valuation to avoid losses. Originally reported by Kiplinger.
Quick answers
- What is an IPO?
- An initial public offering lets you buy a stock when a company first trades in public markets.
- What is the key takeaway from IPOs: Pros, Cons, and How to Invest?
- Investing in IPOs can offer growth but carries risks; evaluate revenue, management, and valuation to avoid losses.
What is an IPO?
An initial public offering lets you buy a stock when a company first trades in public markets.
IPOs offer early price gains
Since 1980, the average first-day gain on IPOs is 19% according to research by Jay Ritter.
IPOs can be risky investments
Newly public companies often have hype and valuations that are hard to justify for long-term investors.
IPOs underperform the market
Historically, IPOs have underperformed the broader market in the first three years after going public.
Revenue predicts IPO success
IPOs with annual revenue over $100 million return 36.4% in three years versus 5.3% for those under $100 million.
Matthew Kennedy's advice
Kennedy says strong growth, expanding margins, and a solid balance sheet are key for good IPOs.
Ritter's IPO analysis
Ritter recommends price-to-sales ratios and avoiding IPOs priced at $5 or less for better returns.
SpaceX as an example
SpaceX went public with a price-to-sales ratio above 90, making it risky for investors.
How to buy an IPO
You can get shares at the IPO price or wait for public trading to buy through your brokerage.
Avoiding IPO pitfalls
Don't chase hype; instead, monitor the stock's valuation and results after buying.
The key takeaway
Investing in IPOs should be treated like any other stock: focus on financial health, not headlines.
The bottom line
Investing in IPOs can offer growth but carries risks; evaluate revenue, management, and valuation to avoid losses.
