This article is written by Kristen Lunman co-founder and general manager of Hatch - a digital investment platform providing Kiwis access to the US share markets. In the fourth of a four part series Kristen shares her extensive knowledge about investing.
IPOs once again hit the headlines this month when Allbirds strode onto the US share markets, seeing their share price soar. But the biggest story was not a company valuation of NZ$5.7 billion after listing, it was that Kiwis took flight alongside them.
In a first, Hatch investors could buy shares at the exclusive IPO price alongside other big league investors before Allbirds went public. Thousands of Kiwis bought shares before they were listed on the Nasdaq, capturing the gains from a strong public debut for the eco-chic footwear brand.
An IPO, or initial public offering, is the process when a company moves from private ownership, owned by founders, backers and employees, to the public, by listing on the share markets for anyone to buy. In the US, until now, buying at the IPO price was the preserve of the financial who's who. Think investment bankers and deep-pocketed investors like Warren Buffet. Typically it's only after the shares list on the share markets and generally experience a price pop, that investors like you and I can buy shares.
Hatch is paving the way for New Zealand investors to take part in the IPO process, providing access to US-listed shares before they go public, starting with Allbirds.
Even in the face of a pandemic, we've witnessed a US IPO bonanza with a tonne of money changing hands. 2020 was a record year for initial public offerings, with a whopping 480 IPOs raising US$174 billion for companies in growth mode, and 2021 has already surpassed it with more than 700 IPOs.
Many listing companies are the unicorns of Silicon Valley, companies privately valued at more than US$1 billion. They have included well-known brands Airbnb, Zoom, Bumble, Uber, Roblox and of course Allbirds. The money raised in an IPO (and the multiple capital funding rounds that preceded it) is channelled into growing the company's products or services, building efficiencies, scaling up, in hopes of improved profitability along the way.
Buying shares in an IPO is not about hype, or grabbing a quick buck. It's an opportunity to get in early, back the companies you believe in and grow up alongside the company over the long term. IPO investors in Amazon who bought shares for US$18 in 1997 when the company just sold books are looking at today's share price of over US$3,500.
So, an initial US$10,000 investment today would be worth over US$1.9 million. And while Facebook's (now Meta) 2012 IPO was initially dubbed a failure - tanking for 16 months - those who stuck it out have seen a healthy return on their investment. The company's pre-listing share price was US$38 and now sits in the mid-US$300s.
How to be IPO prepared
While there's no crystal ball, here are four tips when researching whether an IPO deserves your money.
- Leadership and culture: Due diligence on company management is a must. Uber thought it was in for a home run when it IPO'd but they underestimated the impact of its toxic leadership under Travis Kalanick. While Uber's IPO raised more than US$8 billion they missed their US$120 billion valuation target.
- Growth path: My Food Bag might have overlooked an increasingly heated competitive space. Priced when the share markets were running hot, the IPO price of NZ$1.85 dropped when it was listed to NZ$1.76, now hovering around NZ$1.20.
- Financial information: At around 300 pages a company’s prospectus is a lot to take in but do take particular note of how the company expects to make money, which is often captured in Management discussion/letter and Analysis of financial condition. Past financial performance will be useful to assess whether the company has strong foundations for long-term success.
- Customer loyalty: Enticing new customers costs, so customer loyalty is king in growing profits. Before listing, Allbirds had an unusually high Net Promoter customer loyalty score of 86 percent. In the US the average consumer buys seven pairs of shoes, two-thirds prefer to buy eco-brands, and more than half the company's sales are from repeat customers.
If you're nervous about choosing a single IPO winner, you could consider US exchange traded funds (ETFs) that invest across lots of newly listed companies, helping diversify risk.
Join Hatch to sign up for IPO notifications. There's always risk with investing but like anywhere you choose to invest your money, do your own research, think about your wealth goals and invest for the long term.
This is intended to provide general information only and should not be viewed as investment advice. Before making financial decisions, you may wish to seek independent financial advice.
This article was created for Hatch.
