In May 2019, two innovative companies went public in the space of a week. One was a smashing success. The other has been called "a train wreck."
First, the train wreck: Uber Technologies Inc. (NYSE: UBER). It went down in history as one of the worst-performing IPOs ever.
The Uber IPO priced at $45. Shares opened at $42 when they started trading May 10 - and ended the day at $41.57, 7.6% below the IPO price.
Investors who bought the 180 million shares offered at $45 collectively lost $618 million that day. That's the worst dollar loss for a U.S. IPO dating back to 1975.
Beyond Meat Inc. (NYSE: BYND), on the other hand, is the stuff IPO fantasies are made of.
It debuted on May 2. BYND opened 84% above its $25 IPO price. By market close, the stock was 43% higher than where it opened and 163% above the IPO price.
So, you want to find the next Beyond Meat. And you want to steer clear of the Uber flops. That much is obvious.
But how?
You can start by answering these five questions before you open up your wallet.
1. Is the company profitable? If not, does it have a plan and timeline for achieving profitability?
Many companies have yet to even turn a profit before going public. Go to the SEC's website to find a company's S-1 Filing, which includes information about its business model, revenue sources, and financial health. If the S-1 doesn't say when (and how) the company expects to be profitable - or if it says the company might never be profitable - that's a major red flag. (We're looking at you, Uber.)
2. Does the company have a wide competitive moat, or does it face stiff competition?
Read up on the industry the company operates in. Know what the competitive landscape looks like. Does the company own patents or trademarks to help safeguard against losing market share? In a crowded market - or rapidly growing one - a company better have something that sets it apart from the competition. Especially if it's up against bigger, more established firms.
3. How will the company be using the funds raised in the IPO?
Read through the prospectus to find out how the money from the IPO will be used. If the funds will go toward efforts aimed at generating or expanding revenue - like R&D and marketing - that's a plus. Red flags include paying off debts or excessive third-party fees.
4. Does the company have a solid management team?
Having strong management is vital to the success of a newly public company. Take a hard look at the track record of the people who will be in charge. Consider how long they've been with the company, whether they have prior industry experience, and how much they're being paid. What about "skin in the game"? Is their financial success tied to the company's? If not... that's another red flag.
5. Do you have a risk management plan - and the discipline to stick to it?
Practice proper risk management just as you would with any other investment. IPO investing is speculative, so it's best to only allocate a small portion of your portfolio (1-2%) to IPO stocks. Never invest more money than you'd be comfortable losing.
Consider dollar-cost averaging (buying stock at regular intervals over time) to avoid buying shares at their peak. Finally, steel yourself against "IPO fever." Once you've mapped out your strategy, stick to it.
Following these steps is the best way to get set up with the next trailblazing company about to go public.
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