IPOs – initial public offerings – are fascinating case studies. Some explode, taking investors to the moon with them, while others crash and burn, leaving investors dazed and confused in the wreckage.
So what exactly is an IPO of a stock? Why do companies go public? Which IPOs took off and made investors millions, and what made them so special? And if IPOs are a sign of growth, should you be investing in IPOs?
I’ll answer these questions and more as I investigate the wild world of IPOs.
To the moon: 5 IPOs that soared
In 2010, I wrote a college paper on why everyone and their brother should invest in TSLA. It had already surged from $17 to $24 on its initial day of trading, and I had this wild idea that it could go even higher than $40. However, through a combination of absent-mindedness and empty wallet-ness, I never actually took my own advice.
Had I invested $1,000 at the time, I could cash out my shares today for nearly $36,000 – roughly enough to purchase a factory new Model 3.
Why it blew up
Tesla’s stock price has had plenty of rocket fuel to surge its growth over the past decade. Despite not becoming profitable until 2020, Tesla instilled plenty of investor confidence through strong management, consistent growth, and the massive success of the Model S and Model 3. Plenty of press has also kept TSLA on investors’ minds, as well as Elon Musk’s frequent outreaches to investors.
In college, I based my predictions of TSLA’s growth around two factors: a massive seed investment from Google and Musk’s ability to seize headlines at will. Feels good to be right, even if I didn’t get rich.
Hey, at least I got an A.
The price of a share of Amazon has grown from an IPO of $1.58 to today’s closing price of $3,075.73. Accounting for inflation, that’s a return on investment of 118,686%, meaning that if you’d invested $1,000 you’d be a millionaire-plus-change today.
Don’t feel bad, though; Amazon went public all the way back in 1997. I don’t know about you, but I hadn’t begun investing back then. When Amazon launched, I was probably in the back of a classroom licking a crayon.
Even if you were alive back then and had a trusty broker you could call (no Robinhood back then), you still might have skipped over Amazon’s IPO entirely. Back when Ross was dating Rachel, Amazon was merely a small online bookseller with 256 employees. They’d banked their entire business on the idea that people would prefer to buy books on a clunky HTML site than brick-and-mortar.
Borders laughed at them. Today, of course, Amazon shares sell for the price of a used car.
Why it blew up
Amazon’s share price wouldn’t actually pass $50 until a decade after its IPO when the average American consumer finally grew comfortable with online shopping. As the company expanded its services and solidified its reputation, AMZN saw steady growth throughout the 2010s. The true boom wouldn’t happen until 2020, when share prices skyrocketed by 76%. Your first guess why is right; it’s all because everyone shopped online during the pandemic.
When you look at the entire 24-year lifespan of the stock, Amazon represents an interesting case study as an IPO. That’s because by the time it truly exploded, it had become an entirely different company. It’s funny to think that time-traveling investors would go back and tell themselves “invest in this tiny bookseller; it’s going to run the world.”
A large portion of IPOs launch with overinflated values and never recover. Many predicted, incorrectly, that this would be the fate of tech titan Facebook.
The Facebook IPO went live in May of 2012 with an initial share price of $38. Investors showed middling interest, however, and by September FB had tanked to a price of $17.73.
Some investors were probably still jaded by the overinflation of tech IPOs from the early 2000s. Others might’ve simply been drained by the ongoing recession. The general consensus, however, was that the stock was just overhyped. Fueling this sentiment was the last-minute price hike; FB was supposed to launch at around $30, but underwriters at Morgan Stanley, JP Morgan, and Goldman Sachs shot it up to $38, citing “high demand.”
Investors weren’t convinced, and FB wouldn’t even return to its IPO price for another 15 months.
However, after August 2013, FB would never sink to its IPO price again. Today, it closed at $290.82, meaning if you’d invested $1,000 in 2012 your shares would now be worth $7,650.53.
Why it blew up
I mean, it’s Facebook. Sure, there were valid concerns about how a single social media platform could engage five generations, but Facebook’s purchase of Instagram in 2012 put most of those concerns to rest. As far as deals go, paying $1 billion for their chief Gen Z poacher was like the Louisiana Purchase of social media.
Plus, by the mid-2010s Facebook had finally figured out how to effectively monetize the platform, pleasing shareholders and fueling its growth.
To use a more recent example, if you’d invested $1,000 in the Spotify “IPO” in 2018, you’d have nearly $2,000 today. Sure, merely doubling your cash is pretty paltry compared to the wealth explosions on the rest of this list, but it’s important to remember how little time has passed. SPOT has doubled in value since its “IPO” three years ago; TSLA, AMZN, and GOOG never pulled that off!
I should explain the quotes; some investors say the Spotify IPO in 2018 wasn’t really an IPO since they didn’t sell or price new shares through an investment bank. In fact, Daniel Ek and the Spotify leadership didn’t hire an investment bank at all; they simply let their existing shareholders begin selling straight to the public in what’s known as a “direct sale.” Buyers were interested and share prices have, by and large, ticked upwards since new issue day.
Why it blew up
The Spotify IPO got free publicity for its direct sale approach, with some investors even admiring the lack of a middle man to overhype the stock (see Lyft below for an example of how that can end badly). And despite endless battles with record companies, Spotify continues to chug along as one of the most admired and well-liked companies in tech.
It’s hard to say when and why Spotify’s growth will taper off, but for now, it remains one of the most successful “IPOs” in recent Wall Street history.
Finally, everyone’s favorite blue chip Google launched its IPO in 2004 with a share price of $85 a pop. That may sound high for a stock in 2004, but it’s actually much lower than the $135 they were planning.
See, Google launched its IPO in the wake of the dot-com bubble which finally burst in 2001. Investors weren’t too keen on pouring cash into another “promising” tech company, and to understand their perspective, it’s important to remember how young Google was in 2004. Gmail was fresh out of the oven, Chrome wasn’t a thing, and Yahoo! had just split from Google, costing the company serious market share.
Even with everything going against it, an $85 IPO seemed to be the sweet spot for nervous investors. Share prices jumped 18% on new issue day and investors have been seeing strong long-term returns ever since.
Google did a stock split in 2014, meaning they gave each shareholder an additional share under the ticker GOOGL. Stock splits divide the price of an individual share in two, but double the number of shares on the market. Typically companies perform stock splits in order to make the price of a single share look appealing and affordable to normal investors. It’s a massive flex.
Anyways, if you’d pooled $1,000 into GOOG at the time of its IPO, your shares would be worth nearly $25,000 today. Not bad!
Why it blew up
Naturally, investors can come up with countless reasons why GOOG exploded. Innovation, developing a product suite, effective monetization, you name it.
But one of my favorites, and why investors think Google trounced other search engines, is just by having the best name. By 2004, “Google” had become synonymous with “search on the Internet,” and like Coke, the term Google was recognizable around the world.
Failure to launch: 3 IPOs that lost investors money
Remember how I mentioned that most IPOs fail? Here are some high-profile IPOs that fell well below expectations.
Remember Zynga? It’s the company behind those popular Facebook games from the late 2000s like Farmville and Words with Friends.
The idea behind Zynga was genius; when the rest of the world saw Facebook as a social media platform, founder Mark Pincus saw it as a gaming platform. It was like the Playstation that 100 million people already owned but didn’t have games for yet. His idea was to get in early, make the most popular games, and profit.
That’s exactly what Zynga did, and why half my Facebook notifications in 2009 were to play Words with Friends. Granted, I eventually gave in, and that game is fun as hell (if not particularly original).
With a near-monopoly on Facebook gaming, a household name, and free referral marketing, Zynga had seemingly lit the fuse on an explosive IPO. In the end, however, almost everyone who invested in ZNGA lost money. For the tiny percentage who didn’t, the margins were slimmer than a mobile gamer’s attention span.
So what happened?
Why it failed
You know that romantic couple that always looks perfect on social media, but secretly fights in the background when the cameras are off? That was Facebook and Zynga, circa 2011. The tension started when Facebook noticed how well its gaming developers were doing and began charging a 30% commission on all in-app sales.
This slashed into Zynga’s margins, and things didn’t improve when Facebook pivoted focus to its mobile app faster than Zynga could react. Even when they did, they were subject to another 30% fee from the Play Store and App Store.
Finally, players were just growing tired of Zynga games, and especially of endless notifications from their friends playing them. Competitors had edged into the space with better gameplay and referral incentives, and Zynga couldn’t innovate fast enough to stay on top.
Unbeknownst to all this background drama, if you’d invested $1,000 in Zynga in 2011, you’d have about the same amount now; only less, due to inflation.
Using Slack is like learning to drive a manual transmission. At first, you’re frustrated by its complexity, and you wonder why anyone would choose to use it.
Then one day, it all clicks and becomes muscle memory. Now, I love Slack (and my manual Miata).
The first amazing thing about the Slack IPO is that it somehow got dibs on the stock ticker WORK. In the 150 years since stock tickers were invented, no company took WORK. I guess it was hiding in plain sight!
The second amazing thing about the Slack IPO is that it didn’t take off. As IPOs go, it seemed like a safe bet, checking the following boxes:
- Good reputation.
- Private investor darling.
- Competent leadership.
- Record of growth.
- Solid projections.
And yet, Slack has only just left the IPO hospital, two years after launching in June of 2019. Anyone who invested $1,000 in Slack back then would have about the same now; practically speaking, they’ve lost money due to inflation and broker commissions.
Slack had way more going for it in 2019 than Facebook had in 2012 – so what happened?
Why it failed
Slack’s failed IPO was a “death by a thousand cuts” scenario. Several factors slashed away at investor confidence until share prices deflated from $38 to $25, not to recover for another 18 months. First, although Slack met its revenue targets for Q3 2019, investors saw Microsoft Teams winding up a sucker punch.
Plus, Slack lacks a secret ingredient driving other tech darling IPOs into the stratosphere: a headline-seizing CEO. It’s not required, but it helps. Stewart Jamfield is just too quiet and modest to generate free publicity on Twitter. Case in point, his name isn’t Stewart Jamfield, it’s Stewart Butterfield.
Lastly, and perhaps most gravely for Slack investors, the general investing community just isn’t seeing Slack’s growth potential. With work from home here to stay, many are unsure whether Slack can hold its lead against inevitable competitors. By 2025, it could become the Friendster of workplace chat.
The $23.4 billion dumpster fire that was the Lyft IPO still burns brightly two years later. The smelly inferno serves as a cautionary tale to everyone involved in the IPO process, including private companies, underwriters, and investors.
Private companies watching Lyft struggle to return to its IPO price learned to go public early. If you wait until you’ve achieved peak growth, it’s too late; everyone can see your missed quarters and dirty laundry. Lyft and Uber had been locked in grueling trench warfare for years by the time Lyft went public. Both companies had suffered staggering losses and neither would give in. So for Lyft to ask for public investors in 2019 was like the French army asking for volunteers in 1917.
Underwriters learned that when they’re setting the IPO price of a company that’s losing money, they need to show investors how they’re going to make money. Not my words, but the words of Carter Mack, the investment bank that actually helped Lyft and Uber go public (the latter of which also had a failed IPO).
Finally, investors in Lyft learned to ignore the hype and check the numbers. Lyft’s IPO was valued at an eye-watering $72, due primarily to the hype and perceived demand. However, peel back the curtain and the numbers simply didn’t check out. For an entire year leading up to its IPO, Lyft had been bleeding cash like a whacked pinata, and neither its leadership nor Carter Mack was illustrating a clear path to growth.
As a result, if you’d bought $1,000 shares of Lyft at launch and sold today, you’d be out roughly $200, or six Lyft rides to the airport.
Why it failed
The Lyft IPO was all hype, and investors weren’t buying it. Anyone who subscribes to a single financial newspaper knew the ridesharing company had never turned a profit, and its gruesome, bloody stalemate with Uber was not exactly fertile ground for growth. Lyft had simply gone public too late with an overinflated valuation and reminded investors everywhere about the value of due diligence.
What is an IPO, and are they always good investments?
If you’ve seen The Wolf of Wall Street, you probably recall the scene where Jordan Belfort and his cronies have a “brainstorming session” at his beach house, eventually landing on a Steve Madden IPO.
But, you were also probably left wondering: what exactly is an IPO, and how the heck does it work?
What is an IPO?
IPO stands for initial public offering. During an IPO, shares of a private company are offered to the public for the first time. After this point, the company is considered “public” in the eyes of the investment community, who are now empowered to buy, sell, and trade shares.
Why do private companies go public?
There are a few common reasons why private companies will choose to go public through an IPO:
- IPOs create publicity and legitimacy. In order for a company to go public, it must meet rigorous standards set by the U.S. Securities and Exchange Commission (SEC). The list is long, but in short, your company needs to either have a valuation of $1 billion or have rock-solid fundamentals and the proven ability to stay profitable. Therefore, companies that “go public” are seen as successful, legitimate, and a cut above the rest that haven’t.
- IPOs raise capital. Growing companies need capital to expand further. After a certain point, they can’t keep soliciting seed rounds from venture capitalists or other private investors. Therefore, they go public to generate massive cash from a greater pool of investors.
- IPOs are an exit strategy for early investors. When a company goes public, the value of the shares held by early investors multiplies significantly. So founders may be motivated to go public to increase their private wealth, and that of everyone who invested alongside them.
That all being said, there are drawbacks to going public. It’s difficult, expensive, and dilutes your ownership. Plus, as a founder, you’re subject to more scrutiny and accountability to your shareholders.
But if you’re reading this as a potential investor, you don’t have to think about all that. You’re more interested in one thing: should you invest in an IPO, or not?
Well, one of the first things you should consider is the launch price of the IPO. Is it under- or overvalued? What determines the price in the first place?
What determines the price of an IPO?
A lot of due diligence.
Pricing an IPO isn’t unlike pricing a new product. When a private company hires an investment bank to perform the IPO valuation, they have to consider factors like:
- The success of the company.
- The competitive landscape.
- The “corporate narrative,” i.e. how compelling the company’s mission and story are to the average investor.
- Past growth, and growth potential.
- Market volatility.
And countless more variables. Even after thousands of hours of due diligence, IPO valuations can completely miss the mark, alienating investors and permanently souring the company’s reputation. Oftentimes it’s not even the valuator’s fault; launching an IPO in a volatile market can be like sailing a yacht through unpredictable seas (cue another mental image from The Wolf of Wall Street).
Sure, some IPOs sink, but most are a success, right? I mean, they’re designed to generate growth and capital for shareholders. So wouldn’t investing in an IPO be a safe bet?
Are IPOs a good investment?
Similar to how Lucky Charms are part of a balanced breakfast, IPOs represent a sweet, sugary part of a balanced portfolio. At the end of the day, it’s important to remember that IPOs are just individual stocks, and investing in individual stocks can be extremely risky.
According to CNBC, roughly 60% of IPOs launched between 1978 and 2011 had negative absolute returns after five years. By comparison, roughly 70% of gamblers in Vegas lose money, so your odds of picking the right IPO are only slightly better than playing the roulette table in Caesar’s.
So even though some of the IPOs in this article made their investors rich, it’s important to remember that the vast majority of IPOs earn just a trickle of cash or lose value outright. Don’t feel FOMO that you didn’t bet the farm on the TSLA or AMZN when you could have (especially since you probably weren’t alive for the latter). Besides, most rich Americans didn’t get rich betting on IPOs; they just invested in a low-risk, diversified portfolio. It’s easier, less risky, and you can even automate it.
IPOs are fun to watch. Some take their investors to the moon, while others crash and burn. But regardless of where share prices are today, each high-profile IPO provides a fascinating case study.
As for whether or not you should invest in an IPO, it’s up to you. IPOs are no less risky than other individual stocks – even their own underwriting banks can’t predict how they’ll perform. That said, if you believe in an IPO, a small investment can lend some healthy risk to an already diverse portfolio.