As a new investor, you have to make strategic decisions that will lead to a successful investment for the future.
So, keeping this in mind, let's explore all about IPO investments in detail.
What is an IPO?
An IPO is when private companies become public by selling their shares to the public for the first time. This shift enables the company to secure funds from external investors. In exchange for their investment, these external investors become shareholders of the company.
The upcoming IPO process involves the company transitioning from private ownership to a state where its shares are available for public trading on the stock market. This facilitates capital raising for the company and grants individuals the opportunity to own a stake in the business by purchasing its newly offered shares.
How Do Initial Public Offerings Work?
Initial Public Offerings work by converting a private company into a publicly traded organization. First, the company hires investment banks to guide them through the process of IPOs. In this, all the financial details and plans are shared in a document called a prospectus.
The Securities and Exchange Commission reviews this document to ensure full transparency. After that, the company then goes on a roadshow to attract potential investors. The IPO or SIP price is set based on the demand and value of the organization. Finally, the company's shares become available for public trading on a stock exchange that allows investors to buy and sell them to get a high ROI.
What are the Key Considerations for IPO Investments
#1 - Research the Company
Understand the company's business model, competitive landscape, and financial performance before any investment.
#2 - Evaluate the Prospectus
Read the prospectus carefully to gain insights into the company's risk factors, plans, and management team.
#3 - Consider Market Conditions
Assess the overall market conditions and economic climate before investing.
#4 - Long-Term Perspective
IPOs can be volatile in the short term. So, consider your long-term investment goals and whether you can hold the stocks or not.
#5 - Diversification
Don't put both feet in one shoe. That means diversifying your investment portfolio to manage risk.
#6 - Open a Demat Account Online
Have a demat account online so you can seamlessly apply for and receive allotted IPO shares. Many brokers now offer the convenience of opening a demat account completely online.
Tips for Navigating IPO Investments
#1 - Conduct Comprehensive Research
Thoroughly investigate the organization before committing your funds. Also, examine the company's business model, revenue growth, and future profitability prospects.
#2 - Diversify Your Portfolio
Mitigate overall risk by diversifying your investment portfolio with a combination of established companies and IPOs. Moreover, consider a balanced approach to ensure stability and potential growth.
#3 - Long-Term Holding Strategy
Be prepared for a long-term commitment, as IPO investments or SIP may take time to realize their full potential and deliver a substantial return on investment (ROI). Investing in IPOs means patience, which is a key that allows the company to navigate the post-IPO phase and capitalize on growth opportunities.
#4 - Seek Professional Advice
Ensure to consult with a financial advisor or conduct your due diligence to thoroughly assess an upcoming IPO investment's risks and potential returns. However, informed decisions based on expert advice or personal research contribute to a more secure investment strategy.
The Bottom Line
While investing in IPOs offers potential rewards, it carries inherent risks. Before delving into IPO investments, undertake comprehensive research, grasp the company's fundamentals, and assess broader market conditions. Nevertheless, adopting a cautious approach and prioritizing long-term objectives can make IPO investments a beneficial complement to your overall investment strategy.
When taking this bold step, the organization undertakes its initial Public Offering (IPO) and sells shares of its stock to the public. If you are an investor, you can buy shares at this stage if you think the company has a high growth potential.
Investing in IPOs can be risky because they involve companies that have just gone public and lack historical performance. But with the right strategy, you can always get the best out of the investment. Here are pro tips to guide your decision to invest in newly listed stocks.
Seek Expert Training
This is a no-brainer, but sometimes, new investors overlook it. Investing in stocks has its fair share of complexities. For instance, you must tackle complicated tasks like risk assessment and market analysis.
Understanding such concepts can be difficult if you are a newbie in the industry. To ensure you know what you’re doing and are better positioned to invest prudently, start by taking stock market trading courses. Once you’re knowledgeable enough, dive in and make the best out of the resources.
#1 - Do Your Homework
IPOs are associated with private companies. Unfortunately, no set rules mandate that a private company must share all its financial information with the public. Most entities often cherry-pick details that are more likely to be favored by most investors and hide sensitive information like pending legal issues and financial projections.
To avoid making uninformed decisions regarding an IPO, research extensively before investing. You can start with an in-depth scouring of the internet and pouring through past press releases and financial statements. Don’t forget to study aspects like competitive dynamics and asset market size.
#2 - Gauge the Involved Brokers
Before investing in an IPO, you must gauge the lead broker backing it. Remember, where IPOs are involved, brokers have one indispensable role: to ensure their client raises the funds it needs to keep up and running. And reputable organizations who value their brand will always go with brokers with proven track records and sufficient experience.
If you want to make a safer investment, choose an IPO backed by a strong, established broker. That is crucial because reputable brokerage firms don't underwrite any company they come across, and vice versa is true.
#3 - Read the Prospectus
An IPO prospectus, commonly referred to as a Red Herring Prospectus, is a document that every company issues when they go public. It contains vital information like a company's history, fundamental operations, mission, and business model. A prospectus also tells potential investors how an organization plans to use its money and provides crucial financial information.
Before you purchase an IPO, read the company’s prospectus. It will help you understand the opportunity and assess all potential risks. Most importantly, it will enable you to determine how your money will be spent.
Remember, not all companies can put your investment to good use. Whereas some may use it to make excellent moves like expanding to other regions, a few may risk your finances through poor ventures like high-risk, speculative investments.
The Bottom Line
IPOs are often riskier for investors because they involve young, private companies and don’t give investors access to much-needed trading history. But if you play your cards well, you can reap significant returns from investing in IPOs. Just ensure that, before you commit, you have sufficient knowledge of stock market trading.
Affirm Holdings
Affirm Holdings is a financial technology startup that enables consumers to purchase products and make payments in instalments. Investors interest in the company piqued in August when it entered into a partnership with Amazon. In October of this year, Affirm Holdings also partnered with American Airlines, the perfect time given 74% of Americans said they would spend "more on travel this holiday season than ever before”.
However, the stock dipped in early November after its largest client, Peloton Interactive, predicted underwhelming figures for the rest of the fiscal year, which deteriorated Peloton shares and agitated Affirm’s investors. Nonetheless, Affirm’s share prices have increased by 210% since its IPO in January.
DigitalOcean
DigitalOcean is a cloud computing service provider, providing infrastructure and tools for developers, startups, and SMBs. Since its IPO in March, shares have increased by 143% and the company’s Q3 revenue in 2021 increased by 37% to £83m, rather impressive given its three main competitors are Amazon, Google and Microsoft.
Looking towards the new year, the company is well-positioned to maintain its momentum in increased share price. It is predicted that by 2024 global spending on infrastructure and platform services will total £87bn and DigitalOcean believes that there are currently 100 million SMBs and 19 million developers worldwide that would benefit from their service, meaning it has the capability to expand its customer base exponentially.
GitLab
GitLab is an open-source code repository and collaborative software development platform for large DevOps and DevSecOps projects. On its first day of trading, shares of GitLab jumped 35% from its £57.7 share price to £78, and since then it has jumped further to 58%. This increase is largely down to its customer growth and retention. Customer count grew 32% since the start of the year to 3,632. While customers spending over £75,000 grew 35% to 383. In the first six months of 2021, the company made almost £81m in revenue, with almost £70.8m of that becoming gross profit.
Rivian
Rivian was one of the largest IPOs of 2021, raising £8.9bn. The company went public amidst growing market interest in electric vehicles. Popularity among EV vehicles has meant Rivian stocks have jumped 58% since its IPO in November and is expected to grow even further over the coming years. Currently, only 1% of all UK vehicles are made up by EV cars, yet by 2032 this is projected to jump to 55%, so it’s safe to say that EV vehicles are the future of transport.
TaskUs
TaskUs provides digital business outsourcing services to fast-growing technology companies to represent, protect and grow their brands, and the company provides technology to the likes of Facebook, Uber, Netflix and Zoom. Its success has been as a result of a multitude of factors but its increased presence within the food and ride-sharing industry has been intrinsic as the world opens back up.
TaskUs’s Q3 revenue for 2021 is £150m, representing 64.2% of year-over-year growth, which was entirely organic. Since its IPO in June, its shares have increased by 178%, and as a result of this success, it has managed to create offices in six locations including the USA, India, and Colombia with plans to further expand operations across the globe.
Doximity
Doximity is an online platform that enables medical professionals to collaborate with colleagues, securely coordinate patient care, conduct virtual patient appointments, and stay up to date with the latest medical news and research. Its clients include medical organisations, particularly pharmaceutical manufacturers, health systems, and medical recruiting companies.
With such a large user base on the platform, it should be no surprise that all 20 of the top pharmaceutical manufacturers advertise on Doximity, and the company made over £150m in revenue in 2020. Since its IPO in June, its stock price has increased by 195% and its revenue is estimated to be between £64.3m and £65.1m for the end of Q3 2021.
Looking to next year, instead of striving for a 100% market share of doctors and medical students in the US, the company could potentially expand internationally or into new professions like law or law enforcement - both areas where enhanced communication could improve the industry.
What does the future have in store for these organisations?
While it’s difficult to predict what will happen to these companies in 2022 and beyond, one thing is clear, they all provide services that are in high demand in their respective markets and offer unique products that rival even the largest companies. All six organisations have grown significantly since their IPOs and will continue to be ones to watch as we enter a new year.
So, where did it all go wrong for the Deliveroo IPO? What caused Deliveroo’s underwhelming stock market debut? And what does this mean for the London Stock Exchange as a whole? Below, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, dives deeper into Deliveroo’s shares plunge, the reasons behind this downfall and the future outlook for the now-public company.
Why did investors turn down the Deliveroo IPO?
There are three core reasons that investors chose not to invest in the Deliveroo IPO on its trading debut. Firstly, the stock has a dual-class structure, which means the CEO still has control over the business. Secondly, employee categorisation and the conflict regarding the staff conditions for delivery workers. And finally, higher US Treasury bond yields, which cause rotation of rising stocks, the latter two being local issues.
As for the stock’s dual-class structure, this had a clear negative impact on attracting domestic and large-scale investors to the Deliveroo IPO. For example, the likes of Aberdeen Standard Life, Aviva, Legal & General Investment Management and M&G opted out of this particular investment due to concerns overpower. With Deliveroo CEO, Will Shu, retaining 57% of voting rights, there was a clear imbalance of control between shareholders and management.[1] Ultimately, shareholders feared this structure would leave them with little to no protection, as the company did not qualify for a premium listing.
Following on from this, employee categorisation and the growing conflict over workers’ rights are other key factors that led to the failure of Deliveroo’s trading debut. Previously, Uber faced a similar issue regarding employee categorisation. The UK Supreme Court acknowledged Uber drivers as employees that are eligible for minimum wages, paid vacation and retirement pension. This same ruling proves critical for Deliveroo as, on the one hand, making riders full employees is likely to prevent the company from breaking even as soon as possible and could even impact its ability to continue operating. While on the other hand, big investors are shunning the tech giant over its outlook on workers’ rights.
There is also the social media backlash to consider, with many people posting across their various social media platforms about large-scale investors refraining from taking part in the Deliveroo IPO. Alongside this, there was the mass uproar around the delivery workers' protests and corporate governance, which led to a negative news background ahead of the IPO and a significant decrease in its initial target valuation. The growing power of social media is definitely something for companies to watch out for in the coming years, as most people carry mobile devices and check their media feeds 24/7.
Lastly, US Treasury bond yields rose in March, which led to growth stock rotation and a significant decrease in Deliveroo share prices. This shortfall, unfortunately, occurred at a very problematic time and, in turn, meant investors were less likely to invest in the Deliveroo IPO on its trading debut. In fact, many of Deliveroo’s key competitors suffered a loss due to higher US Treasury bond yields, with DoorDash shares losing as much as 23% since the beginning of March.
The impact on the London Stock Exchange
When looking at the bigger picture, the overall impact of Deliveroo’s trading debut on the UK stock market is pretty insignificant. The London Stock Exchange is still working on easing listing regulations and attracting fast-growth tech companies and ultimately seems pretty unphased by this unfortunate setback. For example, Darktrace, a cybersecurity startup, heads for the FTSE with a £3 billion IPO plan on the London Stock Exchange, and there is a long list of exciting IPOs set to follow in its footsteps.[2]
Analysts also report that Deliveroo's bad start does not have to do much with the UK stock market itself. Instead, the reasons are primarily internal issues, namely the employee categorisation issue. Therefore, Deliveroo's failure is very unlikely to have a huge impact on overall listings going forward, but the London Stock Exchange does need to ensure the next tech IPO to hit the market makes everyone forget about Deliveroo’s underwhelming start.
The future for Deliveroo
While a 30% fall in shares is, of course, not the worst start in stock market history, it is one of the weakest in the London Stock Exchange over the last decade. That being said, the company still managed to raise a substantial amount from retail investors and in Q1 2021, the uptrend was there to stay, with 71 million orders against 33 million last year, and the overall transaction value rising by 130% YoY to reach £1.65 billion.[3]
It is also important to note that the volatility faced by Deliveroo is likely to be temporary, as fundamentally the tech giant continues to reduce costs and is faced with huge growth potential in the online food delivery sector. On top of this, there have been many cases in recent history where companies, especially tech firms, have fallen short at the first hurdle, only to perform relatively well in the longer term. As such, while its trading debut is most definitely not something to shout about, the future for Deliveroo is likely to be bright if it learns from its past mistakes, acts strategically and allows room for rapid growth.
[1] https://www.ft.com/content/72de7a53-e7af-4c6b-af0f-cfd1f8fcbdf5
[2] https://uk.finance.yahoo.com/news/darktrace-ipo-intention-to-list-london-stock-exchange-ftse-tech-uk-090033327.html
[3] https://equalocean.com/briefing/20210416230040264
Now we’re a few months into 2021 and we’ve already seen some incredibly high-profile IPOs including Roblox, Bumble, Moonpig and Dr Martens. However, there are plenty more to come, and these are just some of this year’s most likely major offerings.
Deliveroo
Food delivery company Deliveroo is planning to list on the London Stock Exchange where it is expected to be valued at over £5bn. However, some outlets have reported that the valuation could be as much as £7bn, in which case, early investors in Deliveroo could make around a 60,000% return on their investment once it goes public. Stockbrokers can’t take part in the IPO, but private investors can do so through a £50m UK Deliveroo customer offer. This will occur through a third party called PrimaryBid where customers can initially invest up to £1,000.
Robinhood
Robinhood experienced record growth during the COVID-19 pandemic, attracting millions of locked-down Americans to its gamified trading app. It has been immensely successful since its inception and was valued at $40 billion in February 2021. However, it has been embroiled in plenty of controversies over the years, most recently the GameStop saga which resulted in its CEO Vladimir Tenev testifying before Congress. Robinhood is going public on the Nasdaq exchange, according to CNBC, though both organisations declined to comment.
Nextdoor
Some experts believe Nextdoor, the US-based social media service for neighbourhoods, has the potential to be the biggest IPO of 2021. It’s set itself apart from other platforms like Facebook and Twitter as location determines absolutely everything the app has to offer. The company reports that 1 in 4 American neighbourhoods use Nextdoor with users growing 80% month-on-month since the start of COVID-19 — the question is whether they can sustain once the pandemic ends. Nevertheless, Nextdoor has certainly established itself as a player in the social media landscape and is expecting a $4-5bn valuation.
Chime
Chime is an award-winning, American, online-only bank and is especially unique in that its users can get paid two days before their paychecks. It was the fastest-growing challenger FinTech bank of 2019 and has proven popular during the COVID-19 pandemic too. Towards the end of 2020, Chime even became EBITDA (Earnings Before Interest, Taxes, Debt and Amortization) positive, which is unusual for a startup in its early stages and is sure to make it highly sought-after once the IPO hits the market.
Darktrace
UK cybersecurity giant Darktrace is currently preparing to target a £4bn IPO, potentially making it one of the biggest London stock market debuts of 2021. The company has faced some challenges amidst its plans. Founding investor Mike Lynch is facing US extradition proceedings (though he is not involved in running the company), while Swiss bank UBS recently resigned as one of the lead investment banks on the IPO. However, earlier this month, Darktrace appointed former BT chief executive Sir Peter Bonfield to its board, while it has also been reported that they appointed former Capita executive Gordon Hurst as chairman to guide the company through its IPO preparations.
Wise
TransferWise rebranded as Wise in February 2021, with plans to offer a wider range of products ahead of a potential IPO bid. The British-based money transfer company was recently valued at $5bn by private investors last summer, though analysts believe it may be worth far more now. Wise has also been profitable for four consecutive years, while Sky News has reported that Goldman Sachs and Morgan Stanley will be leading the IPO of one of the UK’s most valuable tech companies ever.
Trustpilot
According to Bloomberg, Trustpilot’s IPO values the company at as much as £1.08bn, with trading scheduled to begin on the 23rd March on the London Stock Exchange. The consumer reviews service hosted 120 million reviews and saw revenue increase to $101.9m in 2020 — it makes money by selling subscriptions to businesses, allowing them to use reviews for marketing purposes and engage with customers on the platform. Trustpilot also narrowed its pre-tax losses in 2020, from $22.6m in 2019 to $12.9m last year.
PensionBee
UK online pension provider PensionBee recently brought forward its plans to list on the London Stock Exchange this year and, according to the Financial Times, has offered customers an opportunity to “register their interest” in its IPO. The company has attracted over 119,000 customers since its 2014 launch and reported a 77% increase in revenue to £6.3m in 2020. Founder Romina Savova told the publication that PensionBee had nearly doubled its users and assets under management every year since its launch and believed the company could continue to grow at a “high double-digit” given the “large” UK market available.
Nicholas Hyett, Equity Analyst at Hargreaves Lansdown
2016 was the quietest year for initial public offerings (IPOs) in the UK since 2009. The uncertainty following the result of the EU referendum stalled a number of planned IPOs and the US also saw the number of companies going public falling to 7 year lows. Low interest rates make debt more attractive to companies looking for funding, while market turmoil early in the year, as well as the political uncertainty surrounding Brexit and the US election, played a part.
Retail investors had the disappointment of being denied involvement in a Lloyds share sale, although there is still time and plenty of opportunity to rectify this with the remaining c. £2 billion stake.
Today’s announcement confirms that more shares have been sold to the institutions through the trading plan and the taxpayer is no longer the largest shareholder in Lloyds. The taxpayer stake has now fallen below 6%.
Looking ahead, now that interest rates are rising in the US and stock markets are hitting record highs, 2017 could see issuing shares return as a popular way to raise funds. Here are some potential candidates for IPO:
O2
O2 is currently owned by Telefonica, and rumours that the Spanish giant is considering an IPO of its UK business have been swirling for some time. With more than 25 million customers nationwide, the group is one of the UK’s largest mobile operators, and also owns half of Tesco mobile.
Telefonica had previously tried to sell the business to Three owner CK Hutchison for £10.3bn, but the deal was blocked by EU regulators. If the company achieves that price tag at IPO it would be the largest flotation since mobile rival Orange listed back in 2001.
O2 has a long track record of ownership by private investors and if Telefonica decides to return O2 to public ownership, the company’s strong customer base would provide an excellent starting point for including private investors in the launch. That might have the added bonus of making customers stickier in what is a notoriously fickle industry.
BGL Group
2016 saw GoCompare.com split off from parent esure. 2017 could see rival comparison website CompareTheMarket.com join it on the stock exchange with owner BGL Group rumoured to be considering an IPO in the first half of 2017.
The website, which is BGL’s most high profile business, was launched in 2006, with its signature Meerkats first appearing on TV screens in 2009. However, the group also operates a similar website in France under the “Les Furets” (the Ferrets) brand, runs a life insurance business and offers support services for other insurers.
The other three big UK price comparison websites are already listed, which should mean that investors are familiar with the model and make a float easier. But why would investors be interested in yet another price comparison business? Well, it’s the most popular comparison site in the UK and grew revenues by 16% last year, compared to just 5% at GoCompare . . . Simples!
Sky Betting & Gaming
Private Equity firm CVC bought an 80% stake in Sky’s betting arm back in 2014, and there were rumours that an IPO was on the cards in September of last year. However, while CEO Richard Flint acknowledged that CVC will be looking to exit the business at some point, and an IPO is a possibility, there was no timescale at that time.
21st Century Fox’s bid for Sky has altered the situation somewhat. Sky still holds a 20% stake in the business and it’s unclear whether Fox will choose to retain it following the acquisition. The group has no gambling operations elsewhere, and faces strict gambling laws in the US. That might put an IPO back on the cards.
The group is currently eyeing international expansion into markets where Sky already has operations, targeting the German and Italian markets. The move follows a 51% increase in UK revenues in 2015/16. That was driven by a strong performance in the group’s sports betting operations, which saw revenues rise 64%, while online gaming (including Bingo, Poker and Casino) grew 36%.
Speculation has suggested the group could be valued at £1.5bn, and (although 3 years is a relatively short term investment for a private equity fund) that would represent a healthy return on the £800m valuation CVC put on the group when they originally invested.
Darktrace
Away from consumer brands, cybersecurity start-up Darktrace is one potential debutant to keep an eye out for.
Founded by a combination of GCHQ spooks and Cambridge University academics, the group’s software uses machine learning and advanced probability mathematics to detect potential threats. The ability to act independently, drawing on inspiration from the human immune system, means that it can react to potential threats quickly and identify never-seen-before anomalies without relying on existing rules or assumptions.
Darktrace has so far raised over $90m, and was recently valued at $500m. The group reportedly told investors back in October that its ultimate ambition was to float on the stock market, but has since denied that there are any immediate plans to do so.
Nonetheless, with stock markets buoyant and it’s one we think might yet make an appearance in 2017. We just hope that the group chooses to list in London, rather than following the depressingly well-worn path of British tech stocks heading for NASDAQ.
Other contenders rumoured to be considering IPOs in 2017 include;
- Vue Cinemas, £1.5 bn - Vue has more than 200 cinemas worldwide, of 85 are in the UK and Ireland. Servicing nearly 90m filmgoers a year
- Air Astana, c.$6.5 bn - The Kazakh national carrier is considering an IPO in either London or Hong Kong.
- KazMunaiGas, undisclosed - State owned oil and gas company, considering London and Hong Kong as listing destinations.
- Sadia, $5 bn - Halal meat manufacturer, currently owned by Brazil’s BRF. Considering London and Dubai.
- IMG Worlds, undisclosed - The owner of the world’s largest indoor theme park is said to be considering a listing in London or Dubai.
- Crawford Healthcare, undisclosed - The advanced wound care manufacturer has said it is looking “a little more closely” at an IPO following the successful ConvaTec listing last year.
(Source: Hargreaves Lansdown)
