Editor's Choice

Initial Public Offerings Are A Bad Investment

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Initial Public Offerings, better known as IPOs, have been known to make investor riches. The only problem is, the riches usually go to the investors who got in before public trading started. Only the wealthiest and most connected investors have access to pre-IPO prices. And unfortunately, that leaves out most people reading this article. Since before the Dot Com bubble, it seemed like there were stories coming out every day how someone made a fortune investing in an IPO. Unfortunately, it isn't as easy these days. With the large number of technology companies, the competition, and most importantly, the aggressive pre-IPO pricing by investment bankers, they are rarely a smart move for investors. Instead, investors should wait until the frenzy has calmed down and then consider making an investment. Below are the four largest companies that have gone public during the last 18 months. While one company has bucked the trend, the other examples should strike fear in the hearts of those wanting to invest their hard earned money on a stock's first day of trading.

(1) Facebook (NASDAQ: FB)

Facebook began trading on May 18, 2012. The stock opened for trading at $42.05 and reached a high of $45.00. At its high price, Facebook had a market capitalization of roughly $123 billion. Not a cheap market capitalization when compared to established companies like McDonald's ($90 billion market cap) and Goldman Sachs ($56 billion market cap). Regardless, many investors piled in and ended up losing a significant amount of money as the stock has decreased in price ever since.

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The stock reached a low point of $17.55. That is a 58% loss for those investors unfortunate enough to have been filled at the IPO opening price. Clearly a better move would have been to exercise patience, wait for the company to clarify their growth plan, and examine a couple earnings reports.

(2) Groupon (NASDAQ: GRPN)

Groupon began trading on November 4, 2011. The stock opened for trading at $28.00 and reached a high of $31.14. At its high price, Groupon had a market capitalization of roughly $934 million. That seems like a relatively expensive valuation for a company that provides coupons and hadn't proven their earnings model yet. Again, much like Facebook, investors rushed in on the first day and have seen similar trading as Facebook. The stock has gone down in almost a straight line and currently trades at $4.58.

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Ironically enough, even though the stock price has decreased by over 85%, the market capitalization has more than tripled. Groupon's current market cap is $2.9 billion, mostly because of insider sales. So although Facebook seems to be on the right path, clearly Groupon isn't, as not even the company's management believes in it.

(3) Zynga (NASDAQ: ZNGA)

Zynga began trading on December 16, 2011. The stock opened for trading at $11.00 before reaching a high of $11.50. Unlike the other two companies discussed previously, Zynga actually showed increases in the share price over the following months, including one strong earnings report. Unfortunately, after reaching a 52 week high of $15.91 in late February, the company has fallen off, including several disappointing earnings reports. Once again, as in our other examples, early investors have gotten crushed. The stock currently trades at $2.63, a 76% loss for investors who got in that IPO price.

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(4) LinkedIn (NYSE: LNKD)

Unlike our other 3 examples, LinkedIn has actually managed to preserve gains for early investors. LinkedIn began trading on May 19, 2011. The stock opened for trading at $83.00 before eventually reaching a high on the day of $122.70.. Since then, the company has had its ups and downs, but currently sits a much a higher price of $112.64. This is a 35% gain for the investors who went long at the IPOs opening price. Even so, the stock did trade as high as $122.70 and some unlucky investors got filled at that price. Even though the stock has performed admirably compared to other IPOs, some investors who went long on the first day are still losing money.

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I think the above examples clearly show that investors need to be cautious with IPOs. Facebook, Groupon, and Zynga have shown that performance usually lags the initial opening price. And even in the case of LinkedIn, a solid performer, some investors who went long the first day are still losing money. Next time you hear the phrase "patience is a virtue," think about applying that initial public offerings.

ET1980 has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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