I was shocked when I realized it this morning…
Nearly a month has passed since we last talked about an initial public offering. I almost can’t believe it.
It’s incredible because last year, there were a record-breaking 480 IPOs on U.S. exchanges. It’s even more incredible because so far this year, we’ve seen 410 IPOs in Q1 alone!
Last year’s record is done for…
Admittedly, there is some burnout associated with only writing (or reading) about a single idea, be it IPOs, DRIPs, Regulation A offerings, or something else. But that’s not why, as the IPO market continues to melt up, we took a breather from the overexuberance.
The real reason we took a breather is the IPO market is overheated, and there just aren't that many companies that fundamentally wow me.
This may sound contrarian, and many will point to stats that note IPOs in 2020 offered a total return of 75%, according to Reuters' data.
But that stat is misleading as the same Reuters report further notes:
A non-professional investor who bought into all of 2020’s public listings at the closing price of each stock’s first day of trade would be up about 28% for the year, less than half the return of an investor who bought in at each IPO price. That is better than the S&P 500’s 15% gain so far in 2020, but far short of the over 40% gain that buying a Nasdaq index fund at the start of the year would have provided.
The Truth No One Else Will Tell You About IPO Investing
Investors want in on new IPOs for one reason and one reason only: They want to get in on a big idea at the ground floor.
But I’ll let you in on a little secret. Buying an IPO doesn’t get you in on the ground floor — it gets you in on the top floor. And what you’re hoping for from there is that the company grows so that the top floor is moved higher.
The Reuters data confirms this.
That said, the strongest companies — ones with sustainable operations and a vision for the future — will absolutely grow well beyond their IPO price and offer folks great investments. Airbnb is a prime example. Without a doubt, its IPO price ($60) ballooned way too fast upon its initial open price of $144. Investors definitely bought at the top, and many of these traders had to endure two weeks of anxiety-inducing losses before the stock took off.
Which leads me to my next point.
IPOs can be very lucrative investments if you time your entry right. The key to this is patience. It’s advisable in today’s exuberant IPO climate to wait for an IPO to establish a support line and then wait a little more to see if the stock bounces off or breaks through that initial support level before staking your claim, which can help you maximize your returns on this year’s hottest IPOs.
Let’s use Facebook’s IPO as an example. There’s no arguing that if you'd bought in on Facebook’s IPO and held it to today, you would have made incredible gains on your original investment.
But retail investors who bought the stock on its first day of open trading on May 13, 2012, had to wait nearly 18 months before they saw any profits. If you wait for a support level to be established, which we see in FB’s chart from August 2012–December 2012, your returns not only would have been much, much larger, but you would have had fewer sleepless nights from wondering when your investment would stop losing you money.
Two IPOs I’m Excited About (and Why I’m Waiting to Establish Support First)
In the sea of IPOs in front of this year, two companies' offerings, in particular, stand out to me.
Those are the Robinhood and Coinbase IPOs. The reason these companies stand out among all others planning IPOs in the coming months comes down to one simple fact.
These two companies are revenue-generating machines, and I think both are only tapping the potential of their operations right now.
You can say what you want about the “nefarious” nature of Robinhood’s revenue model, where it sells real-time app-user trading data to Wall Street giants looking to stay ahead of trends retail investors are keying in on.
But if I’m looking at the bottom line, the company is generating a ton of revenue and is growing its subscriber base as fast as Netflix or Facebook ever were in their heyday.
According to recent SEC filings, Robinhood generated $682 million in payment-for-order-flow revenue in 2020, which accounts for about half its total revenue and represents a 514% increase year on year.
Coinbase, minus the Reddit/GameStop scandal, is in a very similar position ahead of its planned IPO on April 14.
Coinbase is the largest regulated crypto exchange platform in the U.S. and provides users a safe and easy way to buy, trade, sell and store a number of different cryptocurrencies. Upon its market debut, it will trade under the ticker symbol COIN.
The crypto story is one of the biggest growth stories of this century. And since crypto traders still only make up a fraction of the market compared with equities, bonds, and other high-volume assets, I think Coinbase will be an extremely lucrative stock to own as well as it continues to rake in broker fees for crypto transactions and storage.
Coinbase’s popularity among those already indoctrinated into the crypto lifestyle indicates it will continue to be a leader to follow and is sure to garner huge swaths of new investors over the coming years.
And that’s money in the bank for a company that essentially functions as a broker.
But what I really like about Coinbase is the fact that it is constantly adding to its own crypto positions, meaning as Bitcoin, Ethereum, and other altcoins surge in value, the company automatically grows in value too.
Now, if I had to pick one of the two to invest in, I’d put my money in Coinbase. However, if you can afford it, a stake in both should pay off very nicely long term.
Just remember, make sure you let the stocks establish a support level and see how the stock reacts to that support before buying in. This could take a few weeks or even a few months, but when you time your IPO buying like this, you will see a big increase in your total returns.
To your wealth,
Editor, Energy and Capital