Are IPOs Good Investments? What to Learn From Reddit and Trump Stock Flops
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IPOs tend to receive considerable media attention, which often results in novice investors believing they present the market's next golden opportunity. And with the number of IPOs (initial public offerings) slated for 2024 indicative of a revival, they're once again in the spotlight. But the actual value IPOs offer is often misunderstood, which has been underscored by the recent flops of Reddit and Trump Media & Technology Group.
An unprecedented 2,436 companies went public in 2021, but the following two years saw a historic drop-off. In 2022 and 2023, there were a record-low number of IPOs, and companies going public with valuations of $1 billion or more were at their lowest level since the Great Recession, according to Adam Parker of the Financial Times, who cited high interest rates as the principal culprit.
However, it isn't just the Federal Reserve's monetary policy that's limited the number of IPOs in the recent past. Overvaluation and underperformance have been growing concerns on Wall Street.
"Since 2020, the relative return of average IPO measured from its day one closing price has lagged behind its industry group by more than 20 percentage points after the first year," Parker wrote. He noted that more than 60% of the companies going public lag behind their industry averages by over 15% a year later.
So why, then, does the fervor over IPOs persist? In many cases, it can be attributed to lack of investor education.
