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09/13/2019Will WeWork lure the next billion-flop billion-dollar IPOs - which investors must pay attention to
Christoph Rottwilm
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Stockbrokers in New York: There is often a lot promised and kept low on IPOs
Initial public offerings, such as the upcoming US office leasing company WeWork, are always announced in a grand manner and often disappoint - see Uber, Lyft and Slack. How can investors avoid mistakes?
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Growth, profit and many other things: what is crucial in the IPO
The Mitfahrdienste Uber and Lyft, the message app Slack - the list of much-noticed and yet failed IPOs this year could be extended almost arbitrarily. At present, the office space rental company WeWork is causing a stir in the run-up to its planned IPO. In the face of weak business figures and dubious financial transactions of the management adventurous high-rated valuation in the double-digit billions range already fears the next flop.
Once again, the key question arises from the investor's point of view: How to identify a newcomer to the market, where the entry is worthwhile? In other words, what are the factors that make an initial public offering successful for investors?
The answers to this question usually revolve around two concepts: growth and profitability. The ideal company offers both. Firms that are growing steadily while making profits at the same time are the dream of every stockbroker.
In fact, debutants in the stock market - especially young companies in the tech sector - are often, above all, on a rapid expansion course. The profits, so often the promise, are to come later. The price development of these shares is also uncertain, and it is not unusual for them to go down.
Valued billion high - and deep in the red
It is the same with the mentioned examples. For example, Slack did not disappoint at the beginning of September with business figures that, in addition to the obligatory loss, also documented a slowdown in growth. Result: Investors took flight, the stock slipped within a day by 15 percent in the min.
Uber, Lyft, WeWork - they are all too far from being in the black. Worse still, in some cases, management barely makes a secret of the fact that there is not even a way in sight that could lead to profitability.
So what is true, after all, what careful investors have emphasized? An investment in a company that does not make a profit is an overly speculative bet, meaning it is better to "stay away"?
Amazon also wrote high losses for many years
There are counterexamples. The most prominent is probably the now grown up giant giant Amazon Group. When the company went public with Jeff Bezos at the top in 1997, the naked numbers did not look much different than they did today at Uber, Lyft and Co. Although sales grew at a breathtaking pace. At the same time, however, Amazon's losses continued to increase steadily. In 1995, for example, the minus stock market chart showed around $ 300,000. In 1996, it had already become lousy $ 5.8 million.
However, anyone who was deterred by these losses has, as we know, made a huge mistake: for the past 15 years alone, financial calculators spit out an increase of almost 5,000 percent for the Amazon share.
Goldman examines nearly 4500 IPOs: it's all about revenue growth
So what are the most important factors that investors should look for? The US bank Goldman Sachs has also asked this question - and taken to answer almost 4500 IPOs, which has been on the US stock market since 1995.
The result of the study, which Goldman has completed these days, seems to confirm at first glance the speculators who bet on IPOs even if profits in the company in question are nil. Investors should focus their IPOs on revenue growth in the first three years after the new issue , rather than claiming as quick profits as possible, the bank said in a rough summary.
However, a look at the more detailed presentation of the study results shows that investors should not completely disregard profitability. Although revenue growth was the most significant determinant of IPO outperformance, the study found. For example, since 2010, companies with sales growth of more than 20 percent per year have beaten the broader Russell 3000 stock index significantly more than companies with lower growth.
Most newbies disappointed
5
Growth, profit and many other things: what is crucial in the IPO
At the same time, however, especially in the recent past, it has become apparent that a quick profit will also result in an outperformance on the stock market more often, writes Goldman Sachs. Most successful IPO companies, the bank notes, reach the profit zone within the first three years on the stock exchange.
Overall, Goldman Sachs is the IPO business from the investor's point of view, a bad testimony. If one takes the portfolio of all just under 4,500 IPOs examined and assumes a uniform investment in each of the shares, an investor would have achieved a positive result over the past 25 years, the bankers have calculated. The reason for this, however, is above all a mathematical one: although prices can theoretically increase indefinitely, they can however fall by a maximum of 100 percent.
Christoph Rottwilm on Twitter
@Christoph Rottwilm
Thus, the performance of the vast majority of new entrants, according to analysis by Goldman Sachs against the overall market. Only a few high-flyers - see for example Amazon - with their exorbitant price gains, the development of the overall portfolio in the positive area.
In short, investing in an IPO is similar to a lottery game in this regard. There are only a few hits. But if you catch one of them, then there are huge opportunities for profit.
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