Beware of IPOs

 IPO is an acronym for Initial Public Offering. An Initial Public Offering is when the stock of a private company is sold to the public. In other words, the company becomes available for the public to invest in via the stock market. As if the equities market isn't animated enough sitting at all-time highs, currently there is a tremendous amount of buzz surrounding three companies going public in 2026. Those companies are Space X, Anthropic, and Open AI. Space X launched June 12, 2026 and already has a market capitalization of $2.65 trillion. Space X's value currently makes it the world's fifth-largest publicly traded company, leapfrogging Amazon and within spitting distance of Microsoft. Last year, Space X took in $18.7 billion in revenue and lost $4.9 billion, while Amazon took in $717 billion and earned $77.7 billion. Anthropic and Open AI both formally filed their form S-1s with the SEC in early June. They are projected to go public in the last quarter of 2026 and first quarter of 2027, respectively. Both of these companies are expected to top the $1 trillion market cap level right out of the gate. Needless to say, this 2026 mega-IPO bonanza is unprecedented and crazy.

If you would have invested $10,000 in Amazon at its IPO price of $18 per share in May 1997, you would have approximately $28,500,000 today. If you had invested $10,000 in Netflix at its IPO price of $15 per share in May 2002, you would have approximately $7,200,000 today. If you had invested $10,000 in Apple at its IPO price of $22 per share in December 1980, you would have approximately $26,400,000 today. It's easy to see with these three examples why people get so excited about IPOs. So, why am I extremely cautious with IPOs and why do so many well-known investors just say no and refuse to touch an IPO, any IPO, with a 10-foot pole.

There are multiple reasons why IPOs should be avoided. They often feature inflated opening valuations driven by media hype and usually arrive on the scene when market excitement is at its peak (sound familiar?), selling incentives are high, and valuation discipline is low. Traditionally, by the time a company goes public, the easiest money has already been made by the founders, insiders, venture capitalists, and the investment banks who underwrite the stock issue. IPO shares are generally only available to high net worth investors before they become available to the general public via the stock market. Furthermore, the underwriters often price the stock aggressively, leaving little room for immediate growth and making the stock vulnerable to steep sell-offs once the initial excitement wears off. In other words, average retail investors frequently get hung out to dry.

Newly public companies lack a proven track record as a publicly traded entity. Without extensive historical price data, their stock prices can swing wildly on IPO day and during the weeks that follow, making them a risky proposition for long-term or conservative portfolios. Early insiders, executives, and major investors are often subject to "lock-up periods" (typically 90 to 180 days) during which they cannot sell their shares. When these restrictions expire, a flood of new shares can hit the market, causing the stock price to plummet.

In general, IPOs disappoint investors with poor returns. According to Verdad Capital, the median IPO (out of 3,700 IPOs reviewed since the late 1980s) lost 31% of its value three years after its IPO. After five years, the loss was even greater at 41%. In a Dimensional Fund Advisors' (DFA) article titled, "IPOs: Profiles are High. What About Returns?", DFA reviewed approximately 6,400 IPOs from 1991 through 2018. Their research concluded that the collective group of IPOs underperformed the broad stock market (Russell 3000) by 2.20% per year. To put that into context, an investment of $100,000 into IPOs would have been worth $653,000, while the same investment in the broad stock market would have been worth $1,155,000. If you are going to take on the additional risk associated with IPOs, you better make sure you will be compensated for it.

If my powers of persuasion have not convinced you to avoid buying an IPO, then I offer the following bits of advice:

1.) Wait. Let the market determine the stock's true price as opposed to the price the investment bank initially sets. Wait until after the lock-up period ends. Sit back and evaluate a minimum of two or three quarters of earnings before serious consideration is given to the purchase of shares. 

2.) Only invest in an IPO with money you can afford to lose. Don't use your "serious money" such as a retirement nest egg.

3.) Keep your fingers crossed.