IPO boom and its risks for investors and the market as a whole
Lately there is a boom of IPOs on the market, many investors are seeking to get their profits in the initial public offering of one or another company. However, such trends do not always bring the expected result, especially now, when the bullish trend is coming to its end.
The number of IPOs increased sharply after the dynamics of the rise in price of shares of the high-tech segment slowed down. Apple’s market capitalization hit $2 trillion last fall, marking the end of a period of rapid growth. And less than a month later, the cloud service Snowflake went public with the participation of Warren Buffett, Apple’s largest shareholder. Interestingly, the investor had not previously been seen to be active in the IPO.
Analyst of Finam company names several reasons for the growing attention to IPOs. One of them is that investors are less afraid of risks due to lower expectations for index growth.
Another explanation may be the fact that market players have more capital, which allows buying shares of large and not very large companies.
Experts have already repeatedly noted excessive investor optimism as one of the signs of a collapse in the future. The confidence in such a statement is added by multipliers, the level of which has been regularly growing lately. And the high level of these tools is observed precisely in the companies, which have just held or are in the process of listing. For example, during the IPO of KnowBe4 an analyst of Finam noted that when applying the median multiple, the valuation was $1.6 billion, which is 43% less than what was published in the listing organizers’ prices. That said, investors have not given up their intention to buy KnowBe4 stock and are still hoping to recoup their investment with a multiplier of 9. However most likely they will not be able to return the expected sum, because the multiples speak about other figures.
The P/E multiple, which evaluates a company in terms of the ratio of its capitalization and profits, should be a cause for concern. As a result, we can see that a large number of firms that go public have a negative value of this indicator, which means that they are already inherently unprofitable. And this applies both to companies from the healthcare segment and unmanned vehicles – a number of them show minimal revenues. In connection with such trends, there is a growing concern about the growth of IPOs. It should also be noted the increasing popularity of SPAC-companies, through which it is possible to go to the stock exchange, bypassing the standard listing procedure. All this may eventually lead to a crisis and collapse of a number of issuers on the market, which will affect many segments.
