Should We Buy a Stock Straight After Its Initial Public Offering?

Credit: Simon Cunningham

This year saw two of Singapore’s largest private tech firms finally go public. Both have attracted huge public attention and together raised more than $1.5 billion in funding during their listing.

Furthermore, one of these companies had an amazing first trading day, with share prices at one stage soaring 42% above their initial price, making CEO and founder, Tan Min-Liang a billionaire.

But with all that is going on, some investors may be wondering whether it is a good idea to invest in companies that have only recently gone public?

Gems in the making?

Some newly listed companies can go on to become stock market giants. Take Jeff Bezos’ company for instance. The e-commerce giant was priced at just $18 per share during its initial public offering (IPO). After 20 years, and after taking into account three stock splits, the company now trades at around 500 times that initial price.

New and small companies, unlike their larger counterparts, can capitalise on the large market that is available to them and have a much longer runway for growth.

Having said that, not all newly listed companies are made equal. Many companies have big plans for the future but never fulfil that early promise. Early backers of these stocks inevitably lose money in the process

Shorter track record

Warren Buffett is a keen believer in investing in companies that have a long and proven track record. Newly listed companies, however, fail in this regard.

Such companies may have a long history of operations but their time in the public eye has only just begun. This means their past financials and operations are difficult to track and investors usually have less information on their hand.

The management team may also be young and inexperienced, which is another worry for investors.

However, before writing these companies off, it may be wise to have a look at the business model and prospects. Sometimes, the technology or business model that drives these companies far outweigh the negatives that accompany a company with a short operational history.

Short-term volatility

Newly listed companies also tend to have stock prices that are highly volatile in nature. In an earlier article, I described some of the reasons that may contribute to the price choppiness of the stock.

This can be due to insiders dumping their shares after the lock-up period ends or an IPO pops after the first day of trading when the stock is over-subscribed.

Less analyst coverage

Another concern for investors is the fact that newly listed companies have less analyst coverage. The prospectus is a good starting point for information, but the company’s future prospects may be inaccurate without analysts to back the numbers up.

As such investors, looking to invest should proceed with caution and ensure they do their due diligence on the company.

The Foolish bottom line

IPOs always attract a lot of attention from the media and investors who are keen to get in on the action at an early stage. Unfortunately, many of these companies end up with a lot of hype but little to back it up, eventually falling by the wayside.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.