A good investment or a folly?

In recent times, two IPO debacles have caught the attention of investors. The most recent in memory is of course PayTM, which lost 40% in the quote before rebounding somewhat. The most famous of these is Facebook (now Meta), in 2012. Listed at $ 42 on the NASDAQ for a valuation of $ 16 billion, it lost $ 640 million as the price plummeted before be supported by underwriters. Earlier, when some of my readers might still be kids, it was the Dot Com bubble in 2000.

While most IPOs have been successful (and some are blockbusters), there are lessons to be learned, 5 in all. Ask yourself if the company is making a profit, if you are considering an IPO in a bubble, if it is overvalued, if it has honest credentials / governance and if it is well run. Let’s see them in detail.

1. Will the company ever make a profit? That’s what businesses are for. They are expected to have a solid business model and a clear path to profitability no matter the hype. This does not mean, however, that this is short-term thinking only about profits. A business can be disruptive, bring real innovation to the market, and can take years to generate profits. He deserves your money – provided he has a real plan to become profitable someday. PayTM released the largest IPO in India, breaking Reliance Power’s 2008 record. It had made its mark in the digital wallet industry (which was disruptive in their day), but with the rise of UPI, the model was in jeopardy. UPI has proven to be easier to use and adopt, making it even more disruptive. PayTM has tried a lot of other things, but never found its place (although it can still do). With many brokers and analysts bearish on its price / value ratio, perhaps the debacle was to be expected in hindsight. We just went with the hype.

This is nothing new. Reliance Power, the former record holder, has been asked such questions about its business, as has IndiaBulls Power (now RattanIndia). They are in good company – the legendary Goldman Sachs and Facebook also faced IPO debacles because they had no answer on how they would make money in the long run when their registration. Well, now they are.

Doesn’t the CEO have answers on how to make a long-term profit (even if it’s long)? Let me be blunt, however cruel, the fair share price of this company is zero. But if it’s only temporarily unprofitable or if it’s supposed to generate a profit eventually (like Facebook did), then it may still be worth investing, once you’ve done your homework. . PayTM is always an action to watch; don’t write it yet.

2. Is the company part of a bubble? Pets.com, Webvan.com, and eToys.com were some of the biggest names in dotcom start-ups in the 1990s. Their valuation rose due to the “new economy” hype and rushed to issue ” hot IPOs’ to capitalize on the fad. However, they had a small problem: they had no predictable path to profitability. So while these IPOs made money in their early days (raising US $ 82, 375, and 27 million), they reduced those bleeding gains so quickly that none existed in 2001.

Bubbles have come and gone through history. Just a century ago, new technologies – automobiles, railroads, mass production of steel – created one of Wall Street’s biggest bubbles. We know the consequences better than the Great Depression. Two centuries earlier, it was the South Sea Bubble in the UK, triggered by speculative investments in a (ugly) new form of economy – colonialism and the African slave trade. History repeats itself on the stock market, so just keep a watchful eye.

3. Is IPO Too Expensive? An IPO has a fundamental conflict of interest. The company wants to raise as much cash as possible, so it would be interested in selling shares at the highest possible price. The investor wants to be able to sell the stocks he bought at a profit, so he wants to have some margin left when the script is quoted. Shanda Games’ much publicized IPO in the US in 2009 is one of the (un) famous cases of price overvaluation, which raised $ 1.04 billion for the company at $ 12.50 l ‘action. When the investors tried to sell on the day of the listing, they discovered that they had been given a tetrapak with all the juice extracted; Shanda fell 14%.

Most IPOs work because someone was wise enough to leave some room for the IPO investor to make a profit and let the market find the correct price (at the end of the day). account, this is always the case). However, a company’s valuation can increase through good PR and public perception, leading to oversubscription and a race for its stocks, to deal with both public relations and market debacles on the day of. the graduation. But remember, the business can still be profitable in the long run and have a strong business model, despite the disaster. Kalyan Jewelers (2021), ICICI Securities (2018) and ICICI Prudential (2016) are a few examples of companies that have experienced disastrous IPOs but are / were financially sound at the time.

4. Is the IPO badly managed? Is the business badly managed? If there are any contrary announcements, postponements, withdrawals, allegations, do you need to be clear? It’s a lazy answer, but it can pay off to wait for the list and then see where the rice is moving. On the other hand, you can do your own research – valuation, annual reports, filings – and make your decisions as to whether the business is well run and therefore on track to achieve / maintain profitability.

5. What exactly are you buying? The Blackstone group is well known in financial circles. So when he announced an IPO in 2007, there was an obvious hype. But it was not the main company but a spin-off called Blackstone Holdings that was on the table. Not realizing the difference meant investors willingly transferred their wealth to the CEO’s pockets ($ 4.1 billion), only to end up with an egg in their face.

6. Finally, why is the company going public? There may be good reasons, like raising money for expansion, or bad reasons, like trying to pay off debt (leaving you with no chance of making a profit). Today, enough intelligence tools are available for you to tell the difference.

That said, those spectacular bellies are only a tiny fraction of all the initial public offerings. Most only happen when a business has established a solid foundation, is covered by strict rules framed by market regulators and backed by financial institutions. IPOs (and subsequent listing) allow for greater oversight of a company’s governance compared to purely private ownership. They help new technologies and new products find the money to develop. They help the market allocate money to things that have promise, like artificial intelligence, renewables, and blockchain, and take money out of things that have no future in the future. long term, like coal. They make it possible to avoid the domination of a few blue chips on the whole market, which leads to stagnation. IPOs are creatively destructive when done right.

And goodness only means one thing. You do your own research. Indeed, an IPO is no different from a common stock, just the first time it’s traded. The underlying factors are all the same as I talked about in previous articles.

Are you buying from a solid company? It may have been run by a legendary promoter once, but the time that really matters is when you buy. Is he overvalued because of the hype? A CEO who loves cameras isn’t an indicator of a company with business savvy. Does it create or is it part of a bubble? Look at the PE ratio of the stock and its category. Is this a business in decline with no long-term prospects – remember Kodak, the maker of photographic film? Or a fake sunrise? After all, many companies that went bankrupt in the dot-com bubble were perhaps just ahead of their time. App-based grocery delivery (the Webvan promise) is a trivial reality today; just like ordering toys and pet food online.

And last but not least, are you signing up for an IPO because of short-term expectations, or do you really think the company is going to pay you dividends year after year? If the first one, then I pray that you have a huge wallet as you can expect burns on the day of signing up. If the latter, I pray that you have done your research. AirBNB took a huge hit to its profit book during the pandemic, but as travel opens up it’s in the dark again. It released its IPO in the middle of December 2020, but those who kept the faith did well. There may be a debacle because of overvaluation, or something in the news cycle, or management misstep, but long term returns will always be rewarding if the foundation is right.

In conclusion, allow me to reiterate this old adage: the past is not an indicator of the future. All that matters is a watchful eye.



The opinions expressed above are those of the author.


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