There is no sure way to predict a rising bubble for an investment category, but there are some fairly similar warning signals that emerge before the value of an asset exceeds its realistic value. The latest proof of a possible bubble is the dazzling success of a number of initial public offers (IPOs).
The most recent of these is online pet store chain Chewy Inc (NYSE :), whose first daily gain on June 14 increased by one point to 88%. A day earlier, freelance services marketplace Fiverr International (NYSE 🙂 popped 90% higher in the first session, and on June 12, cyber security technology company CrowdStrike Holdings Inc (NASDAQ 🙂 rose by a whopping 87% on the first day as a listed company company.
In total, more than a dozen IPOs have risen this year by at least 50% in their debut sessions, according to data from Bloomberg. Leaps of this magnitude have kept the deal flow active, despite the UH Technologies & # 39; rhythm share app (NYSE 🙂 May 10, which made the debut trading day almost 8% lower.
What does this overwhelming reception from investors show to viewers of soap bubbles? Without going into the business merits and shortcomings of these new players, one thing is clear: investors are ignoring all warning signs about the economy and possible recession that could be just around the corner.
Bank of America's latest monthly global fund manager survey found that fund managers are now just as bearish as they were during the worst financial crisis of a decade ago. This survey also showed that these managers are overweight in cash and stock underweight.
Of course, it is almost impossible to predict which of these companies will be successful and which will put their investors in trouble. However, history tells us that the earlier success of an IPO does not guarantee the long-term viability of the company. A Bloomberg analysis of companies that debuted since the financial crisis and broke more than 100% during their first trading day shows that most stocks have fallen since their first wave.
Growth based on debt
The usual culprit in every IPO debacle was the cash burn that investors initially ignore because these companies are showing a debt-laden path to growth. Take the example of the electric car manufacturer Tesla Inc (NASDAQ 🙂 and the social media app Snapchat developer Snap (NYSE :). Since their successful debut in the last decade, both still burn a huge amount of money and remain far away from being sustainably profitable.
In addition to these failures, we also have winners. Amazon (NASDAQ :), Google (NASDAQ 🙂 and Facebook (NASDAQ 🙂 created enormous wealth for their long-term investors and they remain solid investments. But it is important to note that not all IPOs will be successful, especially if their equity values ​​are driven by pure market fear.
Beyond Meat Inc (NASDAQ 🙂 is a good example – its shares have risen more than 500% since the first session last month. The company undoubtedly has a large momentum and can quickly become profitable, but the rapid and enormous rise in its share price makes it vulnerable to a major correction.
As of last Monday, traders had a short position of about 5.87 million shares of Beyond Meat, about 51% of the float, or outstanding shares available for trading, according to financial analysis company S3 Partners. Bets against Beyond Meat have become so popular that, according to S3, it is one of the most expensive shares to borrow to bet.
Bottom Line
Investing in IPOs can be a successful bet in the short term, especially when a lot of money is chasing new ideas, but that initial euphoria may not last forever. Investors should consider these opportunities with a healthy dose of skepticism. Their stock prices cannot continue to grow at a far-reaching pace forever and these companies have a difficult way for the future to show sustainable profitability.
