Since the tech bubble in 2000, IPOs have been a public fascination.
IPOs come in and out of favor, but they are always interesting to watch.
Selecting the IPO takes careful research and choosing a winning IPO can bring you a healthy return.
Here are three IPOs that had amazing returns, and if you had gotten in early with $1,000, you would have made up to 25K on your initial investment.
Read on to find out more about these unique IPO winners.
IPOs – Getting Started
Before we begin, let’s answer some basic questions.
What is an IPO, and are they always good investments?
IPO stands for initial public offering. During an IPO, shares of a private company are offered to the public for the first time. After this point, the company is considered “public” in the eyes of the investment community, who are now empowered to buy, sell, and trade shares.
Why do private companies go public?
There are a few common reasons why private companies will choose to go public through an IPO:
-IPOs create publicity and legitimacy in the business world. In order for a company to go public, it must meet rigorous standards set by the U.S. Securities and Exchange Commission (SEC). The list is long, but in general, your company needs to have rock-solid fundamentals and the proven ability to stay profitable. Therefore, companies that “go public” are seen as successful, legitimate, and a cut above the rest that haven’t met these goals.
-IPOs raise capital. Growing companies need capital to expand further. After a certain point, they can’t keep asking for private money from venture capitalists or other private investors. Therefore, going public is way for the company to generate massive cash from a greater pool of investors.
-IPOs are an exit strategy for early investors. When a company goes public, the value of the shares held by early investors multiplies significantly. So founders may be motivated to go public to increase their private wealth, and that of everyone who invested alongside them.
With all that in mind, there are also some drawbacks for a company going public. It’s challenging, expensive, and dilutes the ownership of the private investors. Plus, as a founder, you will have more accountability to your shareholders.
But if you’re reading this as a potential investor and interested in investing in an IPO, you don’t have to think about all that yet. You’re more interested in one thing: should you invest in an IPO, or not?
One way to determine if investing in an IPO is for you, is to review the past returns of previous IPOs. Next, you’ll find the three most popular tech companies in the world today.
Let’s dive into some well-known winners of IPOs and evaluate their returns.
Here’s a list of 3 famous IPOs with oversized returns
Google IPO – Market Cap: $24,187.65
Google is one of the largest tech companies in the world today.
Started at Stanford as a graduate project, it quickly grew to a tech behemoth.
Google launched it’s IPO in 2004.
This was three years after the dot-com bubble had burst in 2000. And investors must have had a bad taste in their mouth from the crash, since the initial $135 share price dropped and ended up at $85 a share.
This isn’t too surprising considering the context of the tech industry and the IPO.
Investors still remembered the empty promises of the tech bubble and so they didn’t want to be bitten by another overhyped technology company. Several of Google’s most popular products weren’t around yet. Gmail was still early in its lifecyle. Google Chrome hadn’t been created yet.
Because of this context, the initial IPO price dropped down to $85 per share at lauch. Share prices then jumped 18% when new shares were issued. Since then, the share price has been steadily going up and early investors have experience strong returns since.
In 2014, Google did a stock split, giving additional shares under the ticker GOOGL. Stock splits happen to make the single share stock look attractive to new retail investors. Stock splits double the number of shares on the market but they divide the price of an individual share in two.
Based on numbers at the time this is written, if you had invested $1,000 into GOOG during it’s IPO, your share would be worth nearly $25,000 today.
What was the reason behind Google’s rise? There are many reasons why Google came to dominate. It had better algorithms, deployed new technology, continued to expand, and created an innovative ad platform that became the de facto standard for digital advertisers. Today, almost everyone who is familiar with technology knows the name Google.
Facebook’s IPO
Market Cap: $7,650.53
The Facebook IPO launched in May 2012. It had an initial share price of $38. Investors were not initially impressed and the share price dropped to $17.73 a few months later.
This is an occasional occurrence. If an IPO isn’t first accepted by the public, the IPO price drops down, instead of going up. When this happens, sometimes companies with overinflated values will struggle to recover to their original price. At the time, this drop was a sign that Facebook was doomed to fail. Many predicted it would crash further.
The general consensus of the investment bankers was that the stock price was just overhyped. This sentiment was fueled by the underwriters at Morgan Stanley, JP Morgan, and Goldman Sachs. Facebook was first intended to go public around $30, but the price was raised to $38 at the last minute, due to “high demand.”
Investors weren’t convinced of the value. It would take Facebook another 15 months to reach its initial IPO price.
Yet, once it hit and surpassed that hurdle, it would never return to the lower initial price again. At this time of writing, if you’d invested $1,000 in the initial IPO your shares would now be worth $7,650.53.
At first, Facebook was seen as a risky bet by the public markets. With new expansions and new innovations, Facebook’s market share increased and it’s reputation strengthened. A few of those innovations and expansions including the development of it’s own ad serving platform, the purchase of Instagram, and the focus on small business owners as a revenue source.
A few years after the IPO, it was clear that Facebook finally figured out the toughest part of a social media network – monetization. All of these factors combined gave investors confidence and allows Facebook to grow to be one of the largest technology company operating today.
Amazon’s IPO
Market Cap: $1,201,244.25
The price of a share of Amazon has grown from an IPO of $1.58 to a closing price of $3,075.73.
When you adjust for inflation, your $1,000 investment would have made you a millionaire today. That’s a return on investment of over 118,686%.
Amazon was one of the tech companies to go public around the tech frenzy in the last 90s. Amazon launched it’s IPO in 1997. When Amazon launched, tech boom was in full bloom and was headed for the tech bubble bust of 1999-2000.
At the time, Amazon was not the giant technology company that it is today. It had not launched it’s cloud services, it had not created Kindle, there was no Prime, and there was no One-Click Buy Button or Two-Day Delivery. Amazon was still early in it’s business growth.
Amazon’s share price had flat growth for a few years. It would hover around $50 for 10 years after the first launch. The growth was from a few areas. Consumers grew more comfortable with buying things online. Amazon launched additional retail features. And they launched the tech industry with their introduction of cloud services and online processing power. This steady introduction of new features saw the share price grow at a steady rate, making Amazon a top technology player and skyrocketing Bezos into the top spot as the richest man in the world.
Amazon is a interesting case study in company growth. They began as a small online book retailer, expanded over time, and they are now a technology giant competing with Google and Facebook on several fronts.
Before You Invest In An IPO, Do This One Thing
While these returns are wonderful, IPOs require research and analysis.
If you’re considering buying an IPO, do the research and evaluate the company’s business model. Verify its future plans and see whether the company is consistently profitable or at least has a path to consistent profitability. Don’t assume that an IPO will be profitable. Amazingly, many companies come to the public market without a plan to generate profits.
A new company with a limited history makes the company hard to evaluate. New IPOs often have limited histories and so it can be tough to assess and value them. This is particularly true when a company is in a new area, like the internet companies of the 1990s. Today, AI, ride-sharing and electronic payments companies have these traits.
To get some insight into how the company works and how the stock is valued, investors can look at the massive registration document required by the Securities and Exchange Commission for all new securities. This form is called the Form S-1, or the Registration Statement Under the Securities Exchange Act of 1933. The document must contain specific information for investors, including financial information, the business model, risk factors and information about the industry. This document can be found on the SEC’s website, and it is normally loaded with caveats and disclaimers.
If investors can wade through the document, they can glean enough information about the new company to make a call about the company and decide for themselves on the value of the IPO.
Final words about investing in an IPO
As you can see, when an IPO takes off, it can bring you an oversized returns with even a modest $1,000 investment. The investors who got in early on the IPOs of Amazon, Facebook, and Google are likely millionaires today.
There are many IPOs launched each year, so if you do your own due diligence about the companies and you might be able to uncover the next big IPO winner.