Several IPOs of 2019 Have the Potential to be Very Exciting

IPO

Uber, Lyft, Airbnb, and Pinterest are all scheduled to release their first stock to the public this year. As exciting as this might seem, we still need to exercise enough caution.

Stocks that are either in the technology sector or related to technology comprise some of the hottest stocks out there these days. The technology part of things does allow for more potential for expansion and growth than stocks not related to the expansion of technology.

These stocks therefore move more and their bigger movements in themselves attract quite a bit more interest than if they were much more dull companies. A good comparison would be between Amazon and Kraft Heinz.

As big as Amazon has become, its business is still emerging, as more and more people buy more and more things online, and a lot of this new business goes to Amazon. Kraft Heinz is in the grocery business, and with the demand for groceries being much more finite, companies in the food business fight among themselves over the demand that this finite market provides.

There’s only so much you can do to distinguish your brands, and Kraft Heinz is a very well -established name with lots of brand loyalty and just about everything else you’d want in a grocery company, but the competition is fierce in this market and it’s not really growing very much either, and really can’t, because people only have so much they can spend on food.

The overall size of the sector that a company is in does dictate potential growth to a large degree. In the old days, even companies that were based upon technological improvements usually just plodded along, with few exceptions, due to the limiting degree of these improvements upon the overall market.

Once personal computing entered the scene, things really took off, and we haven’t stopped since. Even all these years later, companies who are riding the coattails of what we could call the personal computing revolution often fly higher and faster as a rule than those who are still basing their businesses on traditional means, the exchanges of value that are not dependent on the increasing usage of computing.

We Are Doing More and More with Information in the Information Age

Just about everyone is connected these days to some degree or another, so the focus on the reach of these technologies has moved from getting more people involved to getting people involved more. We use computing for a lot of things these days, and this is redefining our culture itself in a big way.

Companies whose markets are defined more by technology end up being more exciting overall than ones that do not, if capital growth is what you are after that is. That’s the goal of most investing, in stocks at least, and while some invest for dividends, for most people, it’s seeing the value of their stocks go up that turns them on the most.

Initial public offerings, or IPOs, are also more exiting, since they also have more potential for the growth of one’s capital. IPOs are often underpriced, and even when they are not, we sometimes see their price take off long after the initial shares are issued.

When we have an IPO that is also leveraging technology, then we’re really talking about something that is very potentially exciting. When the companies issuing the IPOs are only issuing a limited number of shares initially, essentially holding back a lot of stock, with the intention of using this strategy to increase the value of the issued stock, now we’re really talking.

This is exactly what is in store for us with several key IPO issues scheduled for 2019, involving companies like digital taxi services Uber and Lyft, digital lodgings firm Airbnb, and online service Pinterest. These may not be as famous as the Amazons, the Googles, the Facebooks, and their large tech-based brethren, but they are plenty well known, and after all, everyone knows that IPOs are simply more exciting pound for pound.

These IPOs are being regarded so significantly by some that they are worried that they will end up taking away volume from the big companies, and to at least some degree, this may end up being true. Some may actually sell their positions with the big guys for the promise of some faster money, and others may even see more long-term value in getting in on the ground floor with these IPOs, just like people did with the big and established tech companies back when they were much younger.

Many investors kick themselves for not getting in early with companies that they see gain a lot of value over time, and this causes them to clamor even more when a well-known company like these are release an IPO. We may even have selective memory here, remembering the hits more than the dogs. Investors often will fall over each other to get in as early as they can with an IPO, and opportunities to get in on the real ground floor, the actual primary issue, are given out like rewards to those of high enough value to a trading firm.

IPOs Do Vary a Lot in Potential

What many people don’t realize is that a lot of the potential comes from how conservative investment banks price these shares when they hit the market. The only time that the market doesn’t decide price completely is when shares first hit the market, and the banks try their best to set the price to match the demand.

Often, they come in too low, but not always. There is a huge amount on the line here for both the banks and the companies who are going public, although the goal isn’t necessarily to extract every last dime out of them, and the company may actually prefer they start out lower and establish some momentum.

This is because the owners of the company, who still hold pretty big positions in it, want to see the price run up, and as it runs up the value of their stock runs with it. If a stock is traded at the optimal current price, where supply equals demand, investors will be disappointed and more likely to give up and sell.

If, instead, we start out lower, with an excess of demand initially, this tends to drive price up more, and the momentum this creates drives prices up further, and often more than offering it higher would have accomplished without this effect.

Not all IPOs end up making a lot of people happy, and they can disappoint as well, and people can lose money on them rather than making the elevated returns they have hoped for.

We can therefore say that IPOs have both more potential for gain and more risk, and the more risk isn’t at all in doubt. Agile traders can manage this risk much better than buy and hold investors, and if things don’t go as planned, you can be left with holding a real dog much longer than anyone should by way of this being your intention.

Most investors therefore should be containing their enthusiasm at least somewhat, which doesn’t mean that they should not invest in IPOs, but instead approach them more cautiously. If we’re looking for long-term growth, it can we wise to sit back and let a stock show us that it is capable of producing the returns we are seeking, which is harder to predict in the early stages of an IPO with no real history to go by.

As these rather exciting IPOs hit the market, we need to realize that these can be considerably riskier propositions than your normal blue-chip stock purchase, and while most investors do not really make much of an attempt to manage risk with the other stocks they purchase, this matters even more when looking to get involved in IPOs.

IPOs are more of a higher stakes card game than normal stocks, where the size of your stack can change more dramatically. While they can be quite profitable, we especially need to know the importance of knowing when to toss our money in the middle of the table and when to toss away the hand. If we can get better at this, IPOs become much more manageable and less risky, without really giving up much of their higher potential.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.