When It Rains, It Pours IPOs
Late last week, 5 well-known tech companies announced plans to go public: Unity Software ($U), Snowflake ($SNOW), Asana (ticker TBD), JFrog ($FROG) and Sumo Logic ($SUMO).
- The largest by sales… Unity Software, who sells tools to help video game developers build games, ended 2019 with sales of $541.8m (The Unity IPO).
- The fastest by growth… Snowflake, who helps companies store and analyze data, grew their sales by 174%. This company is also the most unprofitable… Losing more money, $348m in 2019, than the $264m it generated in sales (The Snowflake IPO).
- The strongest by profitability… Nothing to look at here as none of these companies are profitable.
Should you invest in a company right after it goes public?
The average return for investing in IPOs was 1.1% in 2019 and -16.7% in 2018, lower than the 30.4% and -6.59% return by the S&P 500 in the same years. Does this mean investing in IPOs is a bad call? That depends on the ones you invest in as the range of IPO returns varies widely:
- The best performing tech IPO of 2019, Progyny ($KRTX), was up over 70% by the end of the year.
- The worst performing tech IPO of 2019, SmileDirectClub ($SDC), was down over 50% by the end of the year.
Companies will often start to underperform the market average after 4-7 months of being public. Here’s one reason why: Pre-IPO investors are often prevented from selling their stock for 180 days after the IPO. Once this lockup period expires, many of the investors who sell will drag stock prices down.
PRO TIP: A study by the University of Florida showed that tech companies that went public with over $100m in annual sales at the time of going public performed better than those under $100m.