The tech initial public offering (IPO) hype machine has once again whirred to life on news that Tencent Music Entertainment Group, China’s largest music-streaming company, could be looking to assemble an underwriting team in the coming months and ready an IPO for the back half of the year.
If Tencent goes through with it, analysts peg the company’s valuation at a potential $25 billion, making it one of the largest IPOs ever.
It follows Spotify (of which Tencent reportedly holds a $2.5 billion stake) whose direct listing turned heads but seems to have paid off so far; and Dropbox, which is still garnering buy ratings. But Wall Street is infamous for its IPO roadshows, boisterous meetups set to dazzle and lure investor-types to toss their money into companies on the wave of public listings.
Sometimes it works; some are dazzled and invest at IPO, reaping the benefits years on. Others take a more scrupulous approach.
The hype machine got it right
Warren Buffett has long held an aversion to IPOs.
“You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day but there’s no reason to let that affect your investing strategy at all,” said the Oracle of Omaha at Berkshire Hathaway’s 2016 annual shareholder meeting. “You have to find what makes sense and follow your own course.”
But taking this philosophy has led to some regret over the years. Last year, Buffett said not investing in Google (now under the umbrella of Alphabet) was one of Berkshire Hathaway’s biggest mistakes.
According to an article in Fortune, the legendary value investor was approached by Google’s flounders (now known as Alphabet) just after the IPO with an investment prospectus. Buffett passed.
“I knew the guys,” he lamented years later at a meeting. “And so I had plenty of ways to ask questions or anything of the sort and educate myself, but I blew it.”
Google went public at $85 a share in August of 2004. To put it in perspective, a mere $1,000 invested at IPO would be worth $25,459, according to a recent analysis of high profile tech stocks at IPO versus now (stock price on February 2018) by Waterstone Management Group.
The moral: read through those investor prospectuses with a fine tooth comb.
No shortage of tech IPO successes
Those who put $1,000 into Microsoft when it listed in 1986 for $21 a share would be sitting on $1,259,383 compared to Apple shareholders whose $1,000 worth of stock (at $18 per share IPO) bought in Dec 1980 would be worth $437,589 now.
Those who had the foresight to invest $1,000 in Amazon back in 1997 when it went public at $18 a share would be sitting on $972,653 today, and $1,000 of Netflix ($15 at IPO in May 2002) would be worth $256,331 today.
Other tech IPOs have exploded in value over a short period.
$1,000 of stock in Baidu (China’s answer to Google) went for $27 a share in August 2005 and would be worth $91,252 today. $1,000 worth of Tesla stock (IPO June 2010 at $17) would be worth $19,494 and the same amount worth of Shopify (IPO May 2015 for $17) would be $8,066 today, three years later.
The hype machine kills investors
But for every “what if?” there’s also an epic fail. Look at GoPro, the company quadrupled its $24 IPO price within months. Today it’s worth around $5. Investing $1,000 at GoPro’s IPO in June 2014 would be worth a meager $235 now.
In seven years, shares of coupon disruptor Groupon have fallen from highs of over $26 per share (above the $20 IPO in 2011) to the $4 range, shrinking $1,000 to $231. And wearable tech company Fitbit doubled in the early days after its IPO ($20 in June 2015) but has since hovered around the $5 mark since early 2016. $1,000 invested in Fitbit at IPO would be worth $270 today.
Others have only seen moderate gains when compared with their IPO. $1,000 worth of Blackberry (IPO $7 on October 1997) would be worth $1,670 now; $1,000 worth of Twitter stock at its $26 IPO in November 2013 would only be worth $1,295 now; and cloud computing darling Salesforce, 14 years since its 2004 IPO at $11, is worth $2,041.
Therein lies the other moral: the tech sector is high reward, but with high reward comes high risk. IPOs will always be a gamble. And in the words of the Oracle of Omaha, trying to game the market is for suckers.
“If they want to do mathematically unsound things and one person gets lucky … it’s nothing to worry about,” says Buffett. “You don’t want to get into a stupid game just because it’s available.”