This article is for education purposes only, and not to be taken as advice to buy/sell. Please do your own due diligence before committing to any trade/investment.

IPO stocks: Does it make sense to invest in them?

Record stock prices in the US have resulted in a boom in initial public offerings or IPOs for short as companies capitalize on the market euphoria to get their companies listed. As of 8th October, traditional IPOs have raised approx. $155bn YTD, up 184.7% from a year ago, according to US News.

There have been more than 200 new IPO stocks listed in 2021, of which the largest of them all is Coinbase Global (COIN) with a current market cap of slightly over $52bn. The company debuted on the Nasdaq exchange in mid-April with an initial market cap of approx. $86bn, based on its first-day closing price of $328/share. Its shares opened at $381 and quickly shot as high as $429. Alas, its first day “high price” was also the highest that it has ever gone.

Based on its current price of $248, investors who bought into its hype on the very first day of its listing would have seen an unrealized loss of 24% at present, not exactly the kind of returns expected for a “hot stock” like Coinbase which had garnered strong media attention due to the company being one of the fastest-growing crypto exchange in the world.

 

Would investors have made money if they invested in some of the hottest IPO stocks in 2021?

The table below shows the Top 50 new IPO stocks in 2021, screened based on their current market cap and their respective 52-weeks low and high prices.

new ipo stocks (Top 50 new ipo stocks based on current market cap)

The Top 5 largest new IPO stocks in 2021 are:

  1. Coinbase Global, (first day close: $328, current price $305.63)
  2. Coupang, (first day close: $49.3, current price $28.43)
  3. Roblox, (first day close: $69.5, current price $79.17)
  4. DiDi and (first day close: $14.1, current price $8.56)
  5. Affirm (first day close: $97.2, current price $155.35)

Among the top 5 new IPO stocks ranked by current market cap, only Affirm Holdings and Roblox are trading above their first-day IPO price, the latter just marginally higher.

When compared against their 52-week price range, most of the new IPO stocks, particularly the “hot” ones which were hyped up by the media such as Coinbase, DiDi, Robinhood, etc are currently trading at a price closer to its 52-week low vs. its 52-week high.

Hence, at first glance, it doesn’t seem like a wise strategy for investors to be buying into popular new IPO stocks.

Many of the popular new IPO stocks in this Top 50 list which we might be aware of is Bumble, SoFi Technologies, Kanzhun, and UiPath. Most of these stocks have performed relatively poorly vs. their first-day closing price.

The ones that have done relatively well are Affirm, AppLovin, Olaplex Holdings, TELUS International, DigitalOcean Holdings and Chesapeake Energy, which are counters currently trading close to their 52-week high prices (single-digit percentage differences).

The ones that are the worst-performing are Coupang, UiPath, Toast, Sportradar Gr, Freshworks, On Holding, Agilon Health, Thoughtworks Holding and Ardagh Metal Packaging, which are counters trading close to their 52-week low prices (single-digit percentage differences)

Which are the popular new IPO stocks that have just been listed or are expected to be listed in the coming months? Should investors be partaking in them?

 

5 New IPO stocks to watch out for

#1 Warby Parker

 (Warby parker)

  • IPO date: 29 Sep 2021
  • Estimated IPO valuation: $10bn
  • Current market cap: $4.6bn

Warby Parker is an eyewear company that was recently listed although that listing did not live up to its hype. The company had an estimated pre-IPO valuation of $10bn but is currently trading at less than half that valuation.

A key to success has been the loyal customer base. The company’s Net Promoter Score, which measures customer willingness to recommend a brand using a range from -100 to 100, is a high 83 – better than Apple or Netflix. Warby Parker boasts a 50% sales retention rate within 24 months of first purchase and nearly 100% for over 48 months.

This is a company that is growing its top-line at a 50% rate, with sales of $270.5m reported for 1H21. With an addressable market of $140bn globally, there is still plenty of growth for the company, although fending off competition from the thousands of eyewear companies globally is always going to be a major concern.

 

#2 Instacart

new ipo stocks (Instacart)

  • IPO date: Fall 2021
  • Estimated IPO valuation: $40bn
  • Current market cap: N/A

Instacart is a grocery delivery and pickup service. The app allows customers to select their groceries from many retailers and then deliver them to customers all at once, which is a huge convenience and time saver.

Due to the positive buzz, Instacart managed to attract $265 million in March in its latest funding round, giving it a valuation of $39 billion.

The only thing that could slightly go against the firm is that the economy has reopened, and there could be a negative impact online-sale. However, the shift to digital from physical stores is likely a secular trend that is here to stay.

There could be momentary blips along the way, but the general trajectory is up.

There is no specific date for the IPO of Instacart. It might also go the route of a direct listing. Whichever listing route it chooses, this is a retail-focus stock that is likely to gain lots of attention when it does finally list.

 

#3 Discord

new ipo stocks (Discord)

  • IPO date: Fall 2021
  • Estimated IPO valuation: $15bn
  • Current market cap: N/A

Discord, which allowed for instant messaging, video and voice calls, was popular with gaming communities on Twitch and Reddit in the early days.

The system was released in 2015 and by 2018, Microsoft’s Xbox had agreed to integrate the platform with Xbox Live accounts.

In 2020, Discord announced a concerted effort to expand beyond gaming. To help with this, the company raised $100 million late last year at a valuation of $7 billion.

More recently, Microsoft made overtures to acquire the company for at least $10 billion. But the deal fell apart and the next step now appears to be an IPO which is currently slated to be at the end of 2021.

The company now has over 150m monthly active users, generating the company $130m in revenue in 2020. Just recently, it netted $500m in its latest fundraising round led by Dragoneer Investment Group, leading to a $15bn valuation.

 

#4 Rivian Automotive

new ipo stocks (Rivian)

  • IPO date: Nov 2021
  • Estimated IPO valuation: $80bn
  • Current market cap: N/A

Rivian Automotive is an electric pickup truck startup backed by Amazon and could be the largest market cap stock to be listed over the past year, with an estimated valuation of $80bn. This valuation places it ahead of Ford.

It is not hard to see the appeal: Americans love pickup trucks and the Rivian’s R1T looks like an awesome-looking pickup truck to own if you ever need to own one.

Some investors might think Rivian has missed the boat on the EV show, with demand for EV-related stocks slowing down drastically since the start of the year.

Nonetheless, this counter will likely still be a beneficiary of government initiatives to tackle climate change issues.

Rivian has the backing of Amazon, the latter committing to purchase 100,000 electric delivery vans till the end of 2030.

 

#5 Stripe

new ipo stocks (Stripe)

  • IPO date: Uncertain
  • Estimated IPO valuation: $95bn
  • Current market cap: N/A

Stripe is an Irish-American payment processor that has been a huge beneficiary of the COVID-19 pandemic, as a result of the massive growth in e-commerce.

The success of Stripe is all down to its business model. It encompasses everything you want in a payment processor. The company started as just a payment processor.

However, it has now expanded into a point-of-sale device called Terminal and offers lending and risk management services. When you have all of these solutions under one roof, it reduces the churn rate.

Private equity has also taken notice. Stripe managed to raise $600 million in its latest funding round, lifting its valuation to an eye-watering $95 billion.

Whenever the IPO takes place, expect shares to skyrocket.

 

Trading IPO stocks

From a trading perspective, Affirm Holdings (AFRM) has actually been one of the strong trading candidates picked up by the TradersGPS screener. Looking at the chart, AFRM has had multiple entry signals of late:

AFRM chart 20oct

Entry signals were given in late August, where the stock was poised to break above the resistance around $74. This was followed by a gap up, which is a good sign of strength. Assuming an entry after the gap up had occurred, the trade would have been triggered on 1st September after breaking the high of the previous day’s candle.

The usual question in this case would be – can one still enter AFRM? Most of the time, the most straightforward response would be not to chase the stock, especially since there has already been multiple entry signals (see the green arrows combined with the dark green bars on the Trend Impulse Factor (TIF)).

This example also shows that strong stocks do prove themselves in the price action. Being able to identify them prior to further breakouts would give you an edge over other retail traders. Will there be more of 2021 IPO stocks joining this list of strong trading candidates?

 

Conclusion

Investing in IPO stocks can be a mixed bag. However, more often than not, many of these highly “hyped” stocks fail to live up to their IPO expectations, resulting in a massive correction in their share prices from the first day of listing.

Mot investors should not be “jumping on the bandwagon” on the very first day that these new IPO stocks trade but should wait for a substantial pullback before “getting their feet wet”.

Even if you choose to invest in these IPOs, make sure to allocate no more than a small percentage of your portfolio to it.

While 2021 has been a bumper year for new IPO stocks, that does not guarantee a profit when it comes to investing in these IPO counters, many of them being loss-making in nature. For new IPO stocks that are scheduled to make their debut in 4Q21 or 2022, the most popular one is undoubtedly Stripe.

The company is still keeping everyone under suspense in terms of its listing date but when that time comes, you can bet that it is going to be a stock that everyone wants to get their hands on. Should you be one of them?

 

If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.

If you’d like to get a FREE e-course and learn how to better time your trade entries, click the banner below:

e-course