Money Mondays: The Recent IPO Craze: What You Need To Know

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In today’s “Money Mondays” segment, Mellody Hobson discusses IPOs.

This morning we are talking initial public offerings?

We are, Tom! We have seen an incredible number of IPOs recently, the most recent boom in a crazy IPO market that really started with Facebook. The first quarter of this year has been particularly active. All told, 71 companies have sold their first stock on U.S. markets this year, compared to just 34 in the same time period a year ago, raising $11 billion, a 40% increase. The average IPO is up 24.6% from its offer price, which means we will continue to see a lot of interest in new listings from the market. These are numbers that have not been seen since 2000, at the end of the tech bubble.

 Are we in another bubble, Mellody?

 It really depends how you look at it, because this is really a tale of two different types of IPO. The tech sector certainly looks a bit frothy, with some signs of bubble conditions, including very optimistic initial pricing. King Digital – the maker of Candy Crush – is just one example. However, the fact that the stock price dropped by 15% in its first round of trading does show that the market is paying attention and not simply buying on hype. The same has been true for Twitter since its debut last year.

For the other sectors, the IPO boom has been very stable and looks likely to continue. Part of this is a result of the fact that the companies filing IPOs are not new, unprofitable companies. Many of the companies have been around for a significant amount of time – the class of 2014 are averaging 13 years of operations, and only 66% are currently unprofitable. That number was 75% in the tech boom. When you exclude biotech firms, the percent of companies who are unprofitable drops from 66% to 37%. The average first day gain was 19%, and quarterly gains have come out at 23%. Overall, the non-tech sectors have been performing well, not bubbling over.

What has caused this boom?

 There are a few reason: First, the IPO market was essentially put on pause from 2008 to 2012, due to the Great Recession. There were nearly as many IPO filling in the first quarter of this year than there were during the entire year in 2008 and 2009. Capital simply was not moving. Now that the economy is pickings up, the money is moving again and companies that had been waiting in the wings are eager to soak up some of that cash.

A second reason is the JOBS Act. Language in that bill, which was signed by President Obama 2 years ago in April of 2012, made it easier for companies to file for IPOs in order to raise capital. This has helped to spur the boom.

Low interest rates have also helped keep the IPO market active and optimistic.

Final question: What does this mean for rank-and-file investors in the market?

Broadly, I think this is good for individual investors. As I mentioned, the companies that are going public this year tend to have long track records, and outside of the biotech sector, are proven in many cases. Two things going forward this year: tech is no longer new. Facebook and others have demonstrated that there is money to be made in social media. That is a good thing. However, there are relatively few great opportunities in the sector. Secondly, as the economy improves, it will benefit companies that already have revenue streams that survived the downturn. So if you are in the market, the IPOs should be a net positive for your investments.

 

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