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Investors are finally cooling off on the unicorn IPOs. These used to be some of the hottest stocks on the market and your first chance to own a disruptive new company. But over the last two years, investors have shown they don't value these companies nearly as much as private capital did.
Slack Technologies Inc. (NYSE: WORK) is the perfect example. Slack went public last June at $26 per share, peaked at $42 its first day of trading, and then collapsed to $20 by October.
Now the Casper IPO is the latest example of a hyped-up company struggling once it hits public markets.
We warned our readers to approach this IPO with caution back in October.
But there's more to the story on what happened to Casper Sleep Inc. (NYSE: CSPR). And some people are still making a killing (you could be one of them next time)...
Why the Casper IPO Flopped
Casper Sleep is the disruptive mattress company that exploded onto the scene in 2014. It offers comfortable mattresses at the fraction of a price of other retailers. And the mattresses can be delivered right to your door in a small enough box that one person could handle it.
If it's that cheap and easy, why go haggle at a mattress store and wait weeks for delivery?
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That sort of innovation fetched the company a valuation of over $1 billion. And the company wanted to strike while the iron was hot with an IPO.
But it may have come at the wrong time.
Uber Technologies Inc. (NYSE: UBER) went public in May 2019, and shares promptly plunged 35% by November. The same thing happened with LYFT Inc. (NASDAQ: LYFT). It went public in March 2019, and shares are down 37% since.
If two of the most celebrated startups couldn't get investors excited, then what hope did Casper have?
The first signs of trouble came when the company slashed its IPO target price from between $17-$19 down to $12-$13 a share. That was a warning sign that Casper's underwriters were finding little interest in the company at the higher price. At $12 a share, Casper was worth just $500 million, half of what it was valued at privately.
It got even worse once it started trading.
When the stock hit the public exchanges, it sold for $13.50 a share before plunging 27% to today's price of $9.86.
Casper's IPO is a sign that hype alone won't make a stock successful. Investors are getting weary of the unicorn story and want to see concrete signs these startups can make money.
In Casper's case, the market is now full of "next generation" sleep systems that could be ordered online and shipped directly to the consumer. In fact, we warned last October that this might not be the good deal Wall Street was hawking. Sure, the company passed 1 million mattresses sold in 2018 and expected to be profitable by the end of 2019, but that seemed a bit aggressive.
As far as disruption goes, Casper merely caught the bigger players flat-footed. With their supply chains and marketing muscle, bigger brands like Tempur Sealy International Inc. (NYSE: TPX) are easily caught up. They are already matching Casper in gimmick, quality, and price.
And that doesn't take into account how IPOs are being used to reward insiders at the expense of the public.
These are the early investors who put money in when the company was just getting started. For them, the IPO is their chance to cash out. That's who makes the real money.
But you don't have to be stuck holding the bag when shares drop.
Here's how you can find profitable IPOs to invest in and even get in before the IPO...
How to Play IPOs in 2020
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Money Morning Defense and Tech Specialist Michael Robinson doesn't look at IPOs when they are brand-new. He'd rather let them mature a bit by a few months before buying in.
He's been telling investors for years that they should avoid buying high-tech IPOs when they first start trading. When you buy at the open, you really risk losing big. It's natural, but people just can't wait to get in, thinking they are equal to the big players on Wall Street.
But they aren't.
Just look again at Slack. The stock finally found its floor late last year, and so far this year, it is up 15.6%. Even the mighty Facebook Inc. (NASDAQ: FB) stock famously fell from $42 on its first trading day to $18 in the months following its IPO. Now look at it!
Sure, you will miss a few rocket ships, but with the sheer quantity of companies that come public every year, there will be plenty of profit opportunities.
Michael recommends holding off for six months or more from when the stock hits the market. That's when insiders can first sell their stock, an event that could mean big drop in price as they cash out.
Then, healthy companies start to see their shares push higher, and you can join in on the fun with a whole lot less risk.
Action to Take: Wait at least six months for the lockup period to end before thinking about buying Casper stock. The initial volatility should settle down, and you'll have two quarterly reports to use in your decision-making. And if you want to learn how you can invest in startup companies before they go public, just click here.