This year, as indicated by Figure 1, IPO pricing in the United States has decreased from 275 in 2014 to 154 at the end of October 2015. This represents a 44% decrease. According to Renaissance Capital, “this year tech firms are set to make up their smallest share of the IPO market since 2008 (Demos).” The decrease relates to management seeking higher than expected of valuations in a loose market. As a result, investors are not willing to invest in above average valuations. The Wall Street Journal Market Data Group stated, “through an analysis of stock-sale documents we found that 11 out of 49 venture-capital backed U.S. technology companies with IPO’s since the start of 2014 traded below the per-share value where they last raised money as a private company (Winkler).” This is indicated in Figure 4 and shows that not all IPO’s in 2015 have outperformed. Figure 4 also indicates that not all well-known companies will outperform when traded in a stock market. A brief list of successful 2015 IPO’s include: Shake Shack, Fitbit, Shopify, and Global Blood Therapeutics (Street Insider).
In recent years, financial experts and researchers have tried to determine the long-term performance of IPO’s as compared to Non-Issuers. Many investors believe that IPO’s tend to outperform the broad stock market, but figure 5 indicates otherwise. The underperformance may relate to the fact that most IPO’s lack the financials to support large, or elevated valuations. Also, many large companies that issue are bloated with corporate debt. This, added with less than expected financials, pressures the company’s stock due to its inability to pay off debt. An article stated that, “companies with high leverage had been abl...
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... In conclusion, the feasibility of investing in IPO’s is certain. Yes, both investors whether professional or unprofessional are able, and can, purchase this type of financial instrument; but is it beneficial based on the unpredictability, frequent lack of fair valuation, and the historical performance based on Mr. Jay R. Ritter’s chart, or Figure 5 of this report? Furthermore, in the short run, especially from the recent IPO pricings peak in 2014 to today, the purchase of IPO’s has not been beneficial for either the professional or the non-professional investor. Therefore, it can be concluded that it is: 1) feasible to purchase IPO’s, 2) recently, or in the long-term, unwise, and potentially dangerous to a portfolio, and 3) likely to continue until the market, or investors, begin to act prudent by understanding and weighing the benefits and costs of buying IPO’s.
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