Are IPO’s a good deal?
Should I buy an IPO stock on the opening day?
What is the IPO price and is it the same as the opening price?
Investors can get excited about IPO’s because everyone knows the stories like “if I had bought Apple or Microsoft or Google the first day and kept it I would be a millionaire”. Those types of companies come along once every so often but for every one of those there are a thousand IPO’s that perform like “normal” companies. So, while IPO’s often get more than their fair share of press (especially those in the world of technology), what do you need to know before buying into one?
The Two Prices With Three Different Names
IPO Price – The most often quoted number from any IPO is the “IPO price” but that is NOT the price regular investors get to buy in at. The IPO price is the dollar amount the inside investors get to purchase the stock at and then after that, the stock will go on the open market.
Offering Price – Same as “IPO Price”
Opening Price – On the day the IPO goes public, the shares are offered to you and I, the general public. But based on demand, the price of the stock may open way up (or down) from the IPO price. The “opening price” is the number that should most often be quoted as it is the real price that real investors could have gotten in the first minutes of an IPO trading on Wall Street.
The whole IPO process is very complicated and takes months to complete but you can get a good condensed version of it here.
How Have Recent IPO’s Performed?
Again I want to stress the importance of knowing the difference between the “IPO price” (which regular investors can’t get) and the “opening price” which in my mind is the real price of any IPO.
For instance, Fitbit’s stock has been sinking over the last several months and when it dipped under $20 a share, lots of media outlets informed us that the stock was now under its IPO price. So what? Everyone acts as though $20 (the price all the insiders and muckety-mucks got) was of any importance to us. No, Fitbit long ago sank below the price that matters to all the first day investors that bought the stock at $30.40.
The same scenario is in play with Twitter where the stock is now below its IPO price but way below its opening price. The stock is a solid loser for all the initial inside investors but a BIG loser for anyone who bought on day 1 of the IPO.
I have put together a table showing some of the more recent high profile tech IPO’s along with their IPO prices, their opening prices, and the gain or loss as of 1/12/2016. That gain or loss is calculated comparing todays price to the opening price and NOT the IPO price. This gives a much better representation of how much an average investor would be up or down if he/she bought the stock that first day and still held it today.
|Stock||IPO Price||Opening Price||Today's Price||Gain or loss|
So, IPO’s May Not Be That Great A Deal
Remember, there has been and will continue to be a lot of hype associated with certain technology/Internet IPO’s. If Lyft stock goes public before Uber, you can bet that it will be a BIG story and it will get a worldwide attention. That will drive the opening price much higher than it would if it got little attention. Just like Alibaba before it, the spread between the IPO price and opening price might be huge.
The more pre IPO attention a company gets, the less of a “deal” the IPO may be. Just like ticket prices at a sporting event that can go up to unreasonable levels, the higher the demand for an IPO means the higher the opening price will be. That opening price is often NOT a good deal as the table above shows.