Uber, Lyft, Airbnb and Pinterest: These are just a few of the companies eyeing the public markets this year. And while now considered household names, financial experts say that doesn't necessarily mean you should buy. Experts say you should still proceed with caution if you're thinking of getting in on this deal or any of the other upcoming high-profile IPOs.
People need to ask themselves whether they consider Lyft a technology stock, a transportation stock or a platform, said financial advisor David W. Karp, co-founder of independent wealth specialist firm PagnatoKarp in Reston, Virginia. While these companies' industries may grow, it remains to be seen whether they will do so profitably, Karp added.
The earnestness to get into high-profile IPOs is often prompted by memories of other big-name companies that investors wish they had invested in, said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth. Take Google , for example.
What it also did was make many of its shareholders richer, particularly if they held on to their stock. If you do decide you want to invest, you should do your due diligence, Boneparth added. A company's Form S-1 filed with the SEC will disclose all of its financial details and the risks it identifies for its business going forward. You should also take a look at your own balance sheet, including how much you can realistically afford to invest in the company and whether you will be willing to stay invested if the stock plummets, said Winnie Sun, founder of Sun Group Wealth Partners.
Today's IPO market is different from that of — the height of the dot-com boom — in one notable way: the proliferation of exchange-traded funds since that time, according to Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, an independent investment research firm.
Companies are dropped from the ETF once they have been public for two years. This crop of burly unicorns has adopted that playbook as its formula, and the venture capitalists backing them have not, as far as can be told, dissented from that approach. Even then, it received its fair share of skepticism, but compared to Lyft and these others, it was a minnow. The current cohort seems altogether more dynamic and viable.
Of course, overall market valuations are not as frothy as they were in the late s. Many VCs have now waited years for their investments in Uber to yield returns, and similar pressures exists for all of the unicorns. Ordinary investors should bear this in mind as they consider the newly public companies.
Going public is one way for early investors to cash out. That may be good for investors and early employees, but it is not necessarily good for the companies. Public markets have different demands, many of which are incompatible with the business strategy needed to build profitable long-term disruptive businesses. Public market investors are less tolerant of years of cash burn and spending; for every Tesla and Amazon that engage public market investors successfully, there are a dozen other companies whose share price sinks with every quarter of unprofitability and every pronouncement of management that it is investing for the future.
Dropbox, whose shares doubled from their offering price before falling back, and Snapchat, which is barely half its initial offering price, have seen intense scrutiny of what appeared to be dynamic businesses before they went public. Perhaps that discipline was needed, but it is at the very least a two-edged sword. But to anyone contemplating buying shares, it is probably best to wait and see unless you can afford to lose money.
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