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Kelly Evans: Boring IPOs are better IPOs

Kelly Evans
Scott Mlyn | CNBC

If you're not excited about the big Arm IPO today, you're not alone. It's part of a slew of public offerings this season that can barely generate any enthusiasm. The headlines are pretty cautionary: "Investors Warily Await the Instacart and Arm IPOs." "Arm's IPO Smacks of Bankers' Desperation." Or how about, "Instacart Is In Free Fall As Its Valuation Plunges."  

Gee, who wouldn't want to race in? But it would be worse for the investing public to have gotten in at the peak of the "excitement" cycle. Instacart garnered a $39 billion valuation in a private fundraising round in 2021. Imagine if it instead had gone public that year, amid the meme stock Covid craze that drove the Nasdaq to all-time highs. It could have been a $50 billion listing, perhaps.

And what's it worth now? About $9 billion. You should be thanking the unfortunate venture capitalists who bought its overpriced shares two years ago so that you didn't have to. In fact, the IPOs of the past four years have been a disaster for many retail investors. The 10 biggest IPOs since 2019 are down almost 50% on average from where they closed on their first day of trading, according to Reuters and LSEG. 

And SPACs have been even worse. As J.P. Morgan's Michael Cembalest has chronicled, 90% of them have had negative net returns since the 2020-21 period. These were among the "hottest" listings at the time! If you're a retail investor, you should seriously tread with caution anytime you're tempted to jump into a hot IPO. In fact, 40-60% of IPOs generate negative returns "even in good times," as Cembalest notes.  

The only way to really generate "alpha," so to speak, is to hold a broad basket of IPOs and hope that a few of them turn into Facebook, Google, and Nvidia. Or you could just do what most people do, and own a broad stock index that basically keeps self-selecting for companies with the best growth potential, even if their really cheap days are already behind them.

Otherwise, the only people who really benefit from buying fresh IPOs tend to be the insiders--employees, bankers, and their clients--who get the shares at the IPO price that's typically 15-20% or so below where the stock "opens" for the rest of the retail public.  

And Arm's IPO today is being met with skepticism for a reason. The company did used to be one of the hotter stocks in the market, back before Softbank--best known for wildly overpaying for WeWork--bought it and took it private in 2016. Now, its core end market, smartphones, is much more mature and barely growing. Softbank is only floating around 9% of shares to the public, way lower than the 29% average, according to professor Jay Ritter. And given Softbank's massive recent losses, the listing smacks of desperation.  

So the public is right to be much more choosy about buying IPOs these days, and bankers are astutely trying to price them more conservatively. Arm, Instacart, any other ho-hum offering--they might all turn out to be much better investments here than during their overhyped heydays. At the very least, buyers ought to be much more judicious now than in the recent past.  

See you at 1 p.m! 


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