As Managing Editor Mark Najarian pointed out in last week’s Money and Markets column, the IPO market is moving along at a blistering pace. In fact, Investor’s Business Daily recently reported that the average new issue is up nearly 40 percent from its initial offering price.
Renaissance Capital, a highly respected investment management firm specializing in IPO investing, says that, worldwide, 195 IPOs have priced so far this year, an 81 percent increase from the same time a year ago.
“We’re off to a very strong start this year and we think at the beginning stage of a new long-term IPO cycle,” said Linda Killian, portfolio manager for the Global IPO Fund at Renaissance Capital, an IPO investment and research firm.
From 2008 through 2012, IPO offerings per year were, on average, less than half of historic norms. That changed in 2013, when 222 IPOs launched, the most since 2004. So far, 2014 is on pace to exceed last year. That’s because today’s lofty market levels and high price-earnings ratios make it an attractive environment in which to take a company public, especially given the Federal Reserve’s easy money policies that encourage risk taking across the investment spectrum.
Indeed, IPO market enthusiasm is anticipated to accelerate now that China e-commerce giant Alibaba Group confirmed it plans to file an IPO in the U.S. stock market. Alibaba’s IPO is expected to surpass Facebook (FB) as the largest-ever U.S. tech IPO in terms of money raised and market value.
|Alibaba is expected to be the largest-ever U.S. tech IPO.|
Alibaba is China’s top e-commerce provider, described as Amazon.com (AMZN), eBay (EBAY), PayPal and Google (GOOG) all wrapped into one. Analysts say its IPO could raise $20 billion and give the company a market valuation of $100 billion to $150 billion.
“All of this brings positive attention to the IPO market and underlines how important it is to equity markets overall and our economy,” said Killian.
In reviewing IPO activity so far this year, Najarian reported the following:
* Zendesk (ZEN) leads the way as the biggest winner, according to Renaissance data, pricing at $9 a share on May 14 and trading around $16.95 this week, a rise of nearly 91 percent. The company provides Cloud-based helpdesk software. It rose 40 percent on its first day, giving it a market cap of about $1.2 billion, according to Forbes.
* Kite Pharma (KITE) priced at $17 a share on June 18 and opened up 50 percent. It’s now up 73 percent from the offering price. It develops therapies and treatments for cancer.
* Alder BioPharmaceuticals (ALDR) has a rise of 87 percent; Agile Therapeutics (AGRX) 54 percent; Tuniu (TOUR) 87 percent.
* And, from the recent past, online coupon provider Coupons.com (COUP) rose 88 percent on its first day of trading March 7.
Yet despite their recent successes, don’t let the current favorable IPO pricing trend seduce you into thinking that they are the golden ticket that ensures investment success.
Buying IPOs is tricky business, even for professionals. That’s because there’s lots to consider: the underwriter, the amount of institutional support, management incentive programs, short-term corporate performance as well as the efficacy of the underlying business model.
And it’s the last factor — the efficacy of the underlying business model — that’s most important in determining whether you can make money long-term on an IPO. Unfortunately, most everyday investors aren’t in a position to be experts in many of the specialized business segments in which most of this year’s IPOs operate.
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The health-care sector has recently dominated the IPO market, specifically the biotech field. “The enormous amount of biotech IPOs is a continuation of 2013 but at an even faster pace,” said Scott Sweet, senior managing partner at IPOboutique.com.
Biotech companies such as Dicerna (DRNA), Ultragenyx (RARE), Auspex (ASPX), Revance Therapeutics (RVNC) and GlycoMimetics (GLYC) have all entered the IPO market in 2014 with varying degrees of short-term investment success. Unfortunately, there are few everyday investors who possess the expert knowledge to effectively evaluate the business models of these companies and accurately forecast their chances of success.
Are we in a biotech and new technology bubble? Will investors continue to pour money into these exciting but still quite young industries?
No one knows for sure, especially in industries where disappointments are more common than successes, and the time between an idea for a new medicine or a breakthrough technology and an actual product can take years to develop.
When commenting on biotech companies, Patricia Danzon, a Wharton professor of health care management, says: “There’s a huge amount of real uncertainty about the likely performance of some of these companies — scientific uncertainty about whether drugs will pan out in [late-stage] trials and market uncertainty as to how the products will be accepted. There have been past booms that have ended up being bubbles, and with these early-stage companies, we won’t know until the drugs succeed or fail on the market.”
That’s why — unless you really understand an IPO’s underlying business or you have an extreme appetite for risk — I would advise you to look at other places to invest your money, such as high-quality global franchise companies like Oracle. You might miss out on a golden ticket or two, but you’ll probably come out better in the long run and sleep better along the way.