2020 was a great year for initial public offerings (IPOs) – where companies launch their own shares for investors to buy and sell on public stock exchanges. Among the companies that performed IPOs are Snowflake, a data storage company; DoorDash, a restaurant food delivery service; and Airbnb, the company that connects hosts and guests around the world. (2019 saw Uber and Lyft debut.)
IPOs can be very exciting, but they can also be dangerous. Here is a quick look at the advantages and disadvantages of investing in IPOs, along with a look at five companies that are expected to debut in public markets in 2021.
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The case for IPOs
So, why would you want to invest in an IPO? Well, because with companies you’re excited about and would really like to own, getting into them as quickly as possible seems the best, doesn’t it? Think of all the big companies we’re familiar with, like Amazon.com and Netflix: They rewarded their former shareholders enormously – especially those who entered the first floor.
When companies that people are excited about debuting in the markets, there is usually a business frenzy, causing stocks to rise dramatically in the first few minutes, days or months. Consider, for example, that Snowflake has priced its initial shares at $ 120 each. This is the price at which insiders and connected investors and institutions were able to buy. The shares started trading at $ 245 each, giving these privileged buyers an immediate gain of more than 100%. (Snowflake’s shares were recently traded at $ 323.)
The case against IPOs
Despite the appeal of the IPO’s shares, it is generally best to avoid them. Yes, the first investors in companies like Amazon.com and Netflix have performed phenomenally, but most of the newly launched companies are not the next Amazon or Netflix. And even with those who do, you can profit a lot by buying a few years or many years after your debut. Consider that Amazon had its IPO in 1997, about 23 years ago, but if you only owned it in the last 10 years, you would be over 1,600%, and in the last five years, you would have more than quadrupled your money – apparently with a lot of growth ahead. Netflix debuted in 2002, and those who kept it only in the past decade have increased by about 1,900%. It is not vital to enter a large company when it does an IPO.
Several studies suggest that it is really non-profit, on average, to jump to IPOs, and that the best strategy is to give these new stocks a year or more to establish themselves. Some of these stocks don’t even survive the first year – Pets.com debuted in 2000 and left the market in a year. Many IPO stocks have risen well beyond reason initially – the Webvan delivery service, for example, launched in 1999 and was soon valued at more than $ 6 billion, despite generating only $ 5 million in annual revenue. It went bankrupt in 2001.
Next IPOs in 2021
Still, interest in IPOs remains, and you may want to know what interesting IPOs are expected in the coming year. Here are five main ones that you can at least look at – and perhaps invest in, if and when they don’t seem overvalued.
Robinhood
Robinhood is a relatively new stock trading platform that, through its easy-to-use application, is gaining popularity – especially among younger investors. It had 10 million users at the end of 2019 and reportedly added an additional 3 million accounts in the first quarter of 2020.
Robinhood received a total of $ 1.7 billion in venture capital (“VC”) financing, according to Crunchbase, from VC companies such as Sequoia Capital, Institutional Venture Partners and D1 Capital Partners. It is reported that the company chose Goldman Sachs as its primary underwriter for its IPO, and which may debut with a value of around $ 20 billion.
Bumble
Bumble is a dating app with over 100 million users that has expanded its scope to help its users find friends and connect with other professionals. Its dating service stands out for focusing on women, allowing them to take the first step. Bumble is reportedly looking to debut in open markets in February, with a value of about $ 6 billion to $ 8 billion. Once public, you will have deeper pockets with which to compete against Match Group and others.
Instacart
Instacart is one of the success stories of this pandemic period, experiencing a huge increase in demand, as many consumers who were not previously interested in grocery deliveries suddenly found themselves in need of grocery deliveries. The company appears on many lists of companies expected to go public in 2021. Reportedly, about 85% of American households have access to Instacart delivery, making it a national force. The company was valued at about $ 13.7 billion in a June financing round.
Next door
Nextdoor.com is a popular website and app that allows neighbors to communicate – about lost animals, thefts, holes and recommended handymen, among other things. In October, it was rumored that the company was planning an IPO, possibly with a valuation between $ 4 billion and $ 5 billion.
Stripe
Stripe may be the company among those five you know least about, but it has become a significant player in “fintech” – technology companies focused on finance and financial transactions. He boasted a valuation of around $ 36 billion in a financing round in April, and is probably worth a lot more today. In fact, there are reports of the company seeking additional funding, with an appraisal close to $ 70 billion. Best known for its Stripe Payments system, Stripe services are being used by millions of companies worldwide.
What to do
Overall, it’s better not jump to IPOs. Remember that you can do extremely well by investing in stocks that have been around for some time. They offer the advantage of having several years of financial statements to study, among other things. Instead, a particularly powerful type of stock to invest in is dividend-paying stocks. If you are determined to enter an IPO, make sure you read about them first.