One of the biggest pieces of news in the financial markets is that Uber Technologies Inc. went public last week via an initial public offering (IPO). What does that mean? Well, this means the company now has shares that are available to be bought and sold by anyone with an investment account. The Uber IPO was one of the most anticipated and biggest IPOs in market history. It’s definitely causing a stir for investors, but is it a smart investment? So far, the outlook is not so good.
Uber priced its IPO at $45 a share when selling opened on Thursday, May 9. This put the value of the company at around $75 billion. What’s interesting in the case of Uber is that, though the company’s valuation has gone up enormously over the years, the current stock price for private investors has actually gone down. The company raised money in private offerings over the past few years at high valuations, but changes in the company and market dynamics have put some of the recent investors at a loss. That fact right there should make investors want to pause and do more research before jumping on the IPO.
Unfortunately, as of this posting, the Uber IPO prices have already dropped significantly as the stock fails to perform up to its initial expectations. It might be too early to call it a complete failure, but it is worth monitoring.
We’ve seen it time and time again within the ever-evolving tech industry. Very few IPOs have outperformed their high expectations at the onset, and many have IPOs have seen their stock prices drop in value over time. At Illumination Wealth, we rarely recommend investing in IPOs and this is especially true when it comes to these really large ones like Uber.
The simple fact is that initial public offerings inherently involve quite a bit of uncertainty and frenzy. Uncertainty and excitement lead to risk. And of course, risk is something we’re trying to minimize when helping our clients build long-term wealth management plans. In many cases, they end up being poor investments.
There is always a lot of hype and excitement when one of these big time IPOs comes on the market, so existing investors sell quickly. In addition, the investment bankers attempt to price the stock at maximum valuations to maximize the returns for the company, leading to lower potential of returns for the public investor. Unfortunately, these factors often cause the initial stock prices to open higher than they probably should and those opening prices are not what you got to participate in. This lack of balance upfront eventually leads to imbalance down the line and the prices tend to fall.
We can never know for sure how well the Uber stock will perform in the long run. Only time will tell. However, for every Google or Facebook, there are dozens of others of tech stocks that have not performed well. The IPO market is a bit like playing the lottery. You might get lucky, but you probably won’t. The odds are not in your favor when it comes to IPOs. Playing the IPO market is just not worth the risk, if you ask us. There are so many other investments that can give you more predictable and durable results.