Take Beyond Meat (NSDQ: BYND), which makes plant-based burger substitutes. It hit the market the same week as Uber, rocketing 160% on its very first day of trading. But at that point, the company had only taken in a scant $56 million in revenues over the prior nine months and was nowhere near profitability.
There was certainly a growing market for vegan products, but investors got carried away. Within days of its IPO, Beyond Meat garnered a colossal market price of $4.6 billion, versus $4.4 billion for Wendy's (NYSE: WEN). Keep in mind, the latter had 6,700 global locations that generated $1.6 billion in annual sales and $230 million in free cash flow.
BYND has surrendered about 95% of its value since then.
Then there's Airbnb, whose IPO priced at $68. The stock opened at $144.71 right out of the gate. A gain of more than 110% on the very first trade. Overeager investors assigned the business a market value of nearly $100 billion, more than established leaders Hilton (NYSE: HLT) and Marriott (NYSE: MAR) combined.
Unfortunately, it has been downhill since then.
Don't misunderstand. Getting in at the early stages of an exciting new business can be exhilarating… and profitable. But an IPO isn't exactly the ground floor. When ordinary retail investors are first entering, early venture capitalists and other financial backers are typically exiting (at least once the lockup period expires).
Airbnb had a great opening day in December 2020. But the disruptive lodging business had already been around 12 years, conducting its initial round of fundraising in 2008. Incidentally, the first seed capital from the likes of Sequoia valued the company at $20 million.
From there to $100 billion? That's a 500,000% return.
For the first time in years, though, there is some real excitement in the IPO world – in terms of both quality and quantity. We've got another young crop of superstars ready to make an appearance.
With early support from Meta (NSDQ: META), Databricks could be looking at a 2025 debut. The data analytics software firm is estimated to be worth more than $60 billion.
Be on the lookout for CoreWeave, which leases cloud computing hardware to AI providers. The company has already filed its IPO paperwork and could be finalizing the details.
There is also some excitement around Klarna, a developer of buy-now-pay-later ecommerce payment solutions. The company already has 150 million global users and facilitates 2 million daily transactions for online merchants. It recently partnered with Apple (NSDQ: AAPL), adding its installment plans to the list of Apple Pay options. Valued at $6.7 billion in 2022, the business is now thought to be two to three times as valuable and is working with a syndicate of banks on an IPO.
On the consumer-facing side, ticket resale outlets StubHub and SeatGeek are both on the IPO radar and could list by the end of the year. They stand to benefit from the resurgent demand for concerts, sporting events and other live experiences.
While nothing definitive is in the works, there continues to be long-range chatter involving even bigger fish like fintech Stripe, valued at $90 billion, ChatGPT owner OpenAI, which is now worth $157 billion, and Elon Musk's ambitious SpaceX, which has been pegged at $350 billion.
This is just a small sampling. From aerospace to biotechs to chain restaurants, Renaissance sees the market welcoming as many as 200 new ticker symbols this year – many of them unicorns.
Be cautious, though, and exercise proper due diligence. For every winner, there are dozens of losers. Once the initial pop from the first week fades, newly-minted shares typically lag the market. One study from the University of Florida examined more than 7,000 IPOs over a 35-year period and found that over half (60%) went on to deliver negative returns over the following five years.
Still, the next Apple or Nvidia is out there somewhere.
Of course, just securing an IPO allotment can be challenging enough for retail investors. Investment bankers and brokerages reserve most shares for institutions and high net-worth clientele. Many new listings are oversubscribed and go through a lottery process.
To avoid such headaches, and simply to diversify, those who want to invest in these early-stage businesses might want to consider an ETF or mutual fund. Given the propensity of many of these new issues to tank, I'd prefer active management over a fixed index. Consider the T. Rowe Price New Horizons (PRNHX), which holds a mixed basket of emerging stars, including a number of private placements and brand-new IPOs.
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