We use Uber to go places, Slack to chat with co-workers and Pinterest to save our ideas. Why not own a piece of these companies that increasingly dominate our daily lives?
That's the question for many regular investors as a parade of well-known technology companies are expected to make their stocks available to everyone for purchase this year, not just big pension funds and wealthy people. Lyft was at the head of the line when it had its initial public offering of stock, or IPO, March 29.
Lyft gave investors a lesson in how quickly a company's market value can change. The ride-hailing company's stock surged more than 20 percent from its IPO price on day one. But by the first hour of Lyft's second day of trading, the stock had fallen below the IPO price of $72.
A stumble after a first-day pop perhaps should not have been a surprise, given the track record for IPOs. Here are some considerations if you want to join the IPO rush, which may include Uber and videoconferencing service Zoom.
Do IPOs perform well?
The first day of trading for an IPO is often a great one, when enthusiasm is surging. But IPOs return an average of 21.9 percent in the three years following their IPO, lagging the market.
Some IPOs tend to do better over the long term, notably those that bring in more revenue. Smaller companies, meanwhile, have historically had better first-day gains than their bigger IPO rivals but go on to return an average 20.2 percent over three years. That's well below the market.
What about this crop of IPOs?
Last year, about eight of every 10 companies going public were unprofitable, according to IPO specialist Jay Ritter. That's the highest percentage since 2000. To be sure, companies going public today tend to be much more seasoned. With greater age often comes higher revenue. Last year, the typical tech IPO made 10 times more in sales than the median in 2000, even after adjusting for inflation, according to Ritter.
Buying from an index fund
IPO stocks eventually filter into index funds. Dropbox, for example, had its IPO last year, and its shares are already in more than two dozen ETFs. One ETF focuses specifically on recent IPOs. The Renaissance IPO ETF will add Lyft shares later this week, and it tracks an index that holds companies that have had an IPO within the last two years, giving more weight to the bigger ones. Its returns have topped the S&P 500 over the last three years, although it has lagged since its 2013 inception.
