IPOs and "Unicorn" Investing

Horses vs. unicorns: Public companies at big disadvantage to hot startups

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Many wolf whistles and eye rolls have been directed at the swelling valuations of marquee private young "unicorns," or private companies worth $1 billion or more: Uber valued by venture capital firms at $40 billion, Airbnb at $20 billion, Snapchat at $15 billion, Spotify at more than $8 billion. Yet less noticed is how tough it is for already-public companies that operate adjacent to these private juggernauts to compete for attention and market share. They need to struggle to produce bottom-line results for demanding investors today, rather than a glorious payoff in some bountiful, idealized future. It's tough to be a workhorse when being judged against unicorns.

Etsy shares have been getting smoked since last week's crazy debut

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After a crazy debut, Etsy shares have been getting crushed. The stock fell by up to 9% in trading on Monday afternoon to as low as $24.87. Shares of the Brooklyn-based online craft marketplace are now 24% lower than their debut price of $31 per share. The stock jumped 87% on its first day on the market and closed at $30 after its IPO priced at $16 per share the night before. In a note Friday, Wedbush analysts said the stock was overvalued: "We believe that at 84x estimated 2015 EBITDA after the IPO, ETSY is trading well beyond the high end of any comparable group." They maintained a "neutral" rating on the stock with a price target of $14.

Investing in IPOs: Why Investors Should Proceed with Caution

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The allure of an initial public offering [IPO] is much like a Siren’s song—so captivating that it can make investors lose sight of reason, and so tempting that it often causes investors to abandon the fundamental principles that guide sound decision-making. Warren Buffett aptly described the IPO market recently, stating that “initial public offerings are almost always bad investments.” Indeed, the hype surrounding IPOs frequently pushes those companies out of “attractive value” territory, oftentimes before shares are even made available to the public. There are five main qualities investors should look for in a company before they buy shares. Those five qualities are: strong earnings, attractive valuations, experienced and proven management, competitive advantage over peers, and a positive macroeconomic environment that should support the company’s future growth. The great irony of IPOs? They often lack strength in many or all of those categories, yet, investors are still willing to pay exorbitant premiums to own shares! From a human nature standpoint, I understand why—the prospect of making a quick fortune is enticing and the possibility of being an early investor in the “next big thing” can get the better of our impulses. Sure, sometimes it turns out to be a good bet however, in my experience and based on research—most of the time it’s a bad one.

Comments: Unicorn image source. ETSY image is snap from homepage.  My take on IPO's is that an investor is buying "buzz".  The ETSY chart displays faintly but for a direct link ... here.