Market valuations are so high right now that company founders are looking to IPO, grabbing cash while retail investors hold the bag.
One of the few victims of the stock market–besides Warren Buffett for his failure to capitalize on the downturn–appears to be in the IPO field.
Short for initial public offerings, an IPO is when a company goes from being privately held by founders to held by a legion of day traders who want a piece of the action, sold to them via investment banks for a hefty fee.
The biggest expected IPO this year was Airbnb, which put plans on hold back in March. The short-term rental app company made a confidential filing this month, the first step to going public. Now that it’s refiled, shares could be in your portfolio by the end of 2020.
Of course, things aren’t as good as they seem. When the company first announced, it had a valuation of $31 billion.
Today, the company’s value is closer to $18 billion.
Also joining the list is Peter Theil’s Palantir, which may also file and trade by the end of this year. Palantir isn’t as well known, as it’s been somewhat private about its business practices.
It also doesn’t help that the company is a government contractor, and uses big data to try and do things like predict crime.
Palantir has an estimated valuation near $20 billion, on par with Airbnb’s reduced value. That would make for a massive IPO.
The real question investors should ask themselves in any IPO is qui bono, or who benefits?
A company’s largest owners by the time they go public are the founders, employees who took a risk on a startup in exchange for stock, and often angel and early investors such as private equity and hedge funds.
Once a company has its IPO, all those groups have an exit plan to cash out the increased value of their shares.
Even better, publicly-traded companies tend to trade at a premium to privately-held companies. Private equity deals to buy non-public companies typically don’t pay more than ten times EBITDA.
That’s far less than the 29 times earnings that the average S&P 500 stock trades at right now.
So, going public allows a company to see a significant surge in valuation that enriches existing shareholders even more.
Put it all together, and the fact that company insiders are looking to cash out now may be in recognition of today’s high market valuations.
That bodes poorly for investors looking for a quick return. While IPOs often set a trading price low enough to ensure a good day, some IPOs don’t fare well, leading to immediate losses.
Even Facebook (NASDAQ:FB) struggled for months as the company had to start looking for ways to increase revenues and earnings once it was a publicly-traded company.
Of course, if today’s crazy markets have taught company CFOs anything, it’s that a flagging share price can be immediately reversed with the announcement of a reverse split.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.