The long-term risks surrounding IPOs
00:00 Josh
Turning now to our chart of the day, Yahoo Finance’s Jared Blikre is breaking down why SpaceX’s IPO may be a trap. Jared.
00:04 Jared Blikre
Thank you. It’s not just SpaceX, could be OpenAI, could be any of these big IPOs, could be a small one too. I got some really interesting data from the University of Florida. This is Jay Ritter. He looked at over 9,000 IPOs over several decades and he looked at their returns after three and five years. That’s after their first day launch. What these red bars indicate is that most of these IPOs actually dropped into the red over a three-year period. In fact, I’m going to encircle, I’m going to circle this first group here. Just under 40% were down more than 50% after three years. And then 0 to 50% down, that’s another 20%. So 60% of IPOs are losing money within those first three years. But some of them are winners. So, from 0 to 100%, guess what? We got about 20% of the group in there, and then 16% or more double their price. So that means that they’re up 100%. Just goes to show you that most IPOs are not moonshots. And especially with a lot of these IPOs that are coming so late to the market, like SpaceX, which has been in business for decades now, well, a lot of that alpha is probably out the window. And if you own the Qs, if you own the Nasdaq 100 ETF, you’re probably going to own it anyway after a few weeks. So I just wanted to put some other comments out there and some stats. These come from Kathy Donnelley. Now she’s done some separate work, uh researching IPOs all the way back to 1982, and she sound found some very similar stats. Uh, only 20% of IPOs from 20 1982 to 2017 gained 100% in their first year. So that was versus uh 16% here. She found 20%, but still, it’s less than one in five that we’re looking at here. Uh another really interesting thing, about 91% of IPOs, they will undercut their first day low sometime in their lifetime, and about 1/3 of them are going to do that within three weeks. So what usually happens with an IPO, you might go up that first day, you might get that really nice pop, but then you’ll typically drift down and you’ll undercut that first day low. You’ll see things bounce around and that’s when you want to buy the breakout from that initial range. So it doesn’t hurt to sit on your hands for that first initial uh through that first initial pop and kind of wait for things to settle down a little bit. Back to you, Josh.
02:49 Josh
All right, thank you, Jared.
