The year 2020 was a big year for initial public offerings (IPOs) – where companies debut their own shares so that investors can buy and sell on the public stock markets. Among the companies that have had IPOs are snowflake, a data warehousing business; DoorDash, a food-out-of-restaurant delivery service; and Airbnb, the company that connects hosts and guests around the world. (2019 seen Uber and Lift debut.)
IPOs can be very exciting, but they can also be dangerous. Here’s a brief look at the pros and cons of investing in IPOs, along with five companies expected to launch in public markets in 2021.
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The case for IPOs
Then why would you want to invest in a stock market? Well, because with companies that you are excited about and that you would like to own, it is best to get involved as soon as possible, no? Think of all the big companies we are now familiar with, such as Amazon.com and Netflix: They have rewarded their longtime shareholders enormously – especially those who ended up on the ground floor.
When companies that people are excited about want to appear on the markets, there is often a trading frenzy that causes the stocks to rise sharply in the first few minutes, days or months. For example, suppose Snowflake priced its initial stock at $ 120 apiece. This is the price at which insiders and affiliated investors and institutions could buy. However, the stock traded at $ 245 apiece, giving the privileged buyers an immediate profit of more than 100%. (Snowflake shares recently traded at $ 323.)
The case against IPOs
Despite the attractiveness of IPO stocks, it is best to avoid them. Yes, the earliest investors in companies like Amazon.com and Netflix have done phenomenally well, but most new companies do not appear to be the next Amazon or Netflix. And even with those who do, you can really benefit from a few years or many years after they debut. Think Amazon had its stock market run in 1997, about 23 years ago, but if you only owned it for the last ten years, you would have risen more than 1,600%, and over the past five years, you would have had more of your money doubles – apparently with much more growth. Netflix debuted in 2002, and those who have only been doing so for the past decade are about 1,900% higher. It is not necessary to engage in a wonderful business if it offers.
Several studies suggest that it is actually unprofitableaverage to jump to IPOs, and that the better strategy is to give those fresh stocks a year or so to settle. Some such stocks do not even survive their first year – Pets.com debuted in 2000 and was out of action within a year. Many listed stocks initially rose far above reason – the Webvan delivery service, for example, debuted in 1999 and was soon valued at more than $ 6 billion, despite generating only $ 5 million in annual revenue. It went bankrupt in 2001.
Upcoming IPOs in 2021
The interest in IPOs continues, and you may want to know what exciting IPOs are expected in the coming year. Here are five important things you can at least observe – and perhaps invest in them if and when they do not seem too much.
Robin Hood
Robinhood is a relatively new stock trading platform popularized by its easy-to-use app – especially among younger, newer investors. At the end of 2019, it boasted 10 million users, and reportedly added another 3 million accounts in the first quarter of 2020.
According to Crunchbase, Robinhood received a total of $ 1.7 billion in venture capital (“VC”) funding from VC companies such as Sequoia Capital, Institutional Venture Partners and D1 Capital Partners. It is reported that the company has chosen Goldman Sachs as its leading underwriter for its IPO, and that it may debut with a value of about $ 20 billion.
Bumblebee
Bumble is an appointment app with over 100 million users that has expanded its scope to help users meet friends and connect with fellow professionals. The dating service is characterized by a focus on women and lets them take the first step. Bumble reportedly wants to debut on the open markets in February, with a value of about $ 6 to 8 billion. Once public, it will have deeper pockets to compete with Match group and others.
Instacart
Instacart is one of the success stories of this pandemic period, which is experiencing a huge increase in demand as many consumers who were not previously interested in grocery deliveries suddenly need a delivery of groceries. The company appears on many lists of companies that are expected to be announced in 2021. It is estimated that approximately 85% of American households have access to Instacart delivery, making it a national power. The company is said to be valued at about $ 13.7 billion from a round of financing in June.
Adjacent
Nextdoor.com is a popular website and app that allows neighbors to communicate with each other – including about lost pets, burglaries, potholes and recommended hand type people. In October, there were rumors that the company was investigating an IPO, possibly with a valuation between $ 4 billion and $ 5 billion.
Stripe
Stripe may be the least known of these five companies, but it has played a key role in fintech technology companies focusing on finance and financial transactions. That was a valuation of about $ 36 billion from a round of financing in April, and it’s probably worth a lot more today. There are indeed reports of the company seeking additional financing, with a valuation of about $ 70 billion. Stripe’s services are best known for their Stripe Payments system and are currently used by millions of businesses worldwide.
What to do
In general, it is best to not jump in IPOs. Remember that you can invest exceptionally well in stocks that have been around for a while. This offers the advantage that there are, among other things, various financial statements to study. One particularly powerful type of stock to invest in is dividend-paying stocks. Only read it if you are determined to go to a scholarship.