2020 set a new record in the U.S. stock market; in a year of heightened economic turbulence, the collective amount of money raised from stock sales throughout the year came in at $435 billion. This is rather astonishing considering that the previous record was 2014 at $279 billion.
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One major contributor to this record-breaking amount was the IPO frenzy which generated around $100 billion, just under a quarter of the generated cash. Indeed, it seemed that investors were looking beyond the economic and political climate and betting big on the future once the world returns to normal.
However, despite the overarching success of the IPO market this year, there are some lessons to take from 2020, namely, don’t buy the hype, buy the company. Taking two companies who went public last year we look at what strategy investors should bring forward this year when looking to invest in 2021’s IPO market.
Snowflake (NYSE: SNOW) went public in September in what was the largest software IPO recorded. The offering valued Snowflake at $33 billion which had more than doubled by the time it opened for trading, reaching a market cap of just under $75 billion.
The key to Snowflake’s success is its dual capability, providing not just data storage, but also utilizing its cloud storage software to make the data ‘queryable’. This makes it easier for clients to access and gain insights into their own company. Snowflake has a first-mover advantage in this respect.
Yet, by December it was trading at x100 its projected revenue for 202; this is not sustainable. The hype surround this stock and its incredible IPO failed to highlight the fact that this is a company that is competing against businesses with long arms, deep pockets, and household name status. What makes this worse is that although its competitors, namely Google, Microsoft, and IBM, are playing catch up, Snowflake remains reliant upon them for its data storage infrastructure.
This company still needs to prove it can compete with its competitors and it will only be able to do this over time. For investors this year, you would do well to be cautious and to thoroughly research the risks involved when investing in a company that is about to go public, particularly ones that compete almost exclusively with some of the biggest players in the stock market world.
Amwell (NYSE: AMWL) presents a different case. Having IPOd in September, the stock peaked in October up 68% at $38. Since then it has come back down again to almost IPO level at $25 per share. It seems that investors, which were cheering Amwell on back in September are now worried about the company’s success in a post-COVID world. Yet, whilst Amwell has seen its price drop, Teledoc has weathered the roll-out of the COVID-19 vaccine particularly well as digital health services are likely to be a continuing trend. So why is Amwell not performing equally as well?
Amwell might be the latest digital health service provider to join the ranks of public companies, but this does not play in its favor. For a company that rode the coronavirus wave, going public in the middle of the pandemic only served to highlight its need to capitalize independent of the current economic cycle.
The hype surrounding its IPO was mainly generated by Google’s $100 million investment into the company. Overall, the company is likely to do well in the long term, particularly with Google’s backing, but the lesson we should take from its IPO is that the hype fueled by the pandemic might not pay off in the long term. Sometimes it is best to wait a while and see how the stock performs once the hype has died down.
Lessons for 2021
This year, investors would do well not to taken in by the hype; whilst we have all gotten excited over IPOs such as Airbnb, Snowflake, and more, the hype only serves to help us overlook a red flag or two.
So, take a step back and do your research. Think about the long term outlook and if you can see this company being profitable over the next few years. Otherwise, happy investing!
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