How to Invest in a Post-IPO Tech Company

Fifth Third Bank

 

Initial public offerings—or IPOs—tend to generate significant excitement among investors eager to get in early on the next Apple (APPL) or Alphabet (GOOGL).

What happens with a stock post-IPO, however, is unpredictable: It’s during this period that the company must prove it can exceed the frequently high expectations of the press, market analysts, and investors.

And often it can’t—at least initially.

Which means post-IPO share prices can swing wildly during the IPO’s earliest trading days. Dropbox (DBX), Spotify (SPOT) — which did a direct listing, not a traditional IPO — and Snap (SNAP) are memorable examples of tech firms experiencing the real-world challenges of beating earnings estimates.

Yet, despite the potential volatility, the potential upside remains tantalizing to investors and, as a result, tech IPOs appear poised to continue the current ‘white hot’ streak.

Tempted to join the throng? Here’s what you need to know before you buy.

Why consider post-IPO tech stocks for your portfolio?

For those investors who thrill to the latest tech advance or are loyal to brands operating in those spaces, post-IPO stocks offer an opportunity to become more involved in that sector.

If you’re an avid travel app user, for example, you might track the pre- and post-IPO performance of car or home sharing apps such as Uber, Airbnb, or Lyft. There are many social media, cloud, data, and software tech companies — and many global — considering or launching IPOs as well.

How you choose to invest in a given tech IPO will depend upon your appetite for risk and long-term investment goals: Self-directed investors can purchase shares individually. If you qualify, you might get in on a new IPO before it starts trading on the open market. There’s also at least one IPO-based index funds for those with lower risk tolerance levels.

New tech IPO filings are regular as private tech companies that amassed unprecedented multibillion-dollar valuations finally go public. With some boasting returns of over 60%, a wisely chosen tech IPO can prove to be a healthy addition to your portfolio.

Pros and Cons of Buying Post-IPO Tech Stocks

Technology is one of America’s fastest expanding sectors, andits stocks dominate the S&P 500. Tech stock IPOs are helping make 2018 one of the .

It’s easy to identify those—such as, say, Adobe (ADBE.OQ) and Microsoft MSFT)—that are now S&P 500 (.SPX) leaders.

There are, of course, caveats: Tech companies do sometimes get overvalued and their stocks can be overpriced during the pre-trading stage—see, for example, theso-called unicorns or firms valued at over $1 billion. And researching valuations can be a difficult task because a tech firm’s filing statement disclosures, detailed financials, and prospectus may be accurate but aren’t necessarily unbiased.

Another concern is a tech firm’s ability to sustain growth and meet or beat earnings estimates. Price volatility regularly occurs with IPOs because of market shifts or unexpected business setbacks. Sharp drops in post-IPO tech share prices with little recovery in sight can negatively effect your portfolio.

Select Post-IPO Stocks with Performance in Mind

Consider post-IPO investment the way you would any other stock purchase: Conduct your due diligence carefully. Read respected tech publications that objectively report on tech company pre-IPO and post-IPO performance—including operations and internal changes. Compare a stock’s gains or losses in value to benchmarks or to peer firms whose shares you’re considering.

Be objective and patient in your investment decision, allowing the stocks consolidate and break out of its first base before buying.

Monitor post-IPO earnings results to look for evidence to support the strength of fundamentals reported during the IPO transaction phase. Understand what to look for in charts you’ll see.

Factor in offering price versus opening price, lock-up periods, and post-IPO reporting requirements that weren’t present pre-IPO that affect the firm's balance sheet.

Also consider foreign currency and stock market investing risks, post-IPO volatility, and other post-IPO dynamics

Determine the market position of post-IPO tech firms relative to others in their industry including current and potential market share: How much competition do they have? Are there potential sector disruptors?

Avoid market hype and resist relying on experts for predicting stock pricing and performance because studies show they often guess wrong. Know how to limit your losses.

Most importantly, speak with your wealth manager or financial advisor about your intentions to determine if post-IPO stocks are the best match for your portfolio as well as your short- and long-term financial goals.

Investing involves risk, including the possible loss of principal invested.

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The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.