Last year proved to be an excellent year for initial public offerings (IPOs), with big names like Alibaba, which ended up being the biggest IPO in history, going public on U.S. exchanges. Data shows that last year, there were 273 IPOs, which the folks at Fidelity Investments say is the most since 2000, when there were 406.
This year is already shaping up to be another big year for IPOs, and activity is expected to pick up later this year. But is it worth the risk to invest in IPOs?
A look at last year’s IPOs
According to data analyzed by Fidelity Investments, the companies which held their IPOs in 2014 raised a collective $85 billion, with about one-fourth of that being raised by Alibaba alone ($22 billion). That amount is a 55% increase from the amount of capital that was raised the year before. It’s also second only to the amount that was raised in 2000, which was “only” $96.9 billion even though the number of IPOs was so much higher than it was in 2014
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Here’s a look at the history of IPOs dating back to 2000. All graphs and charts in this article are courtesy Fidelity Investments.
Already this year, we’ve had some hugely successful initial public offerings, including Box’s and Shake Shack’s IPOs. GoDaddy had its IPO earlier this month, and Virtu Financial was off and running in its debut just this week. There are also several highly-anticipated ones yet to come this year.
Is investing in IPOs worth the risk?
At first glance, it may seem like getting in early on companies that are going public will pay off. Twitter, Shake Shack and others enjoyed tremendous gains in their first few days of trade. Many newly public companies also posted solid annual returns, with last year’s IPOs averaging a return of 21%. Here’s a look at average returns from the last five years.
However, as you can see, it’s still a decline from the previous year’s average return of 41%, and not all companies generate significant interest in their debut as a public company. Additionally, new stocks can be very volatile in their first few months on a stock exchange, especially on their first trading day.
Fidelity points out that while LinkedIn shares soared, more than doubling on their debut in 2011, BrisConnections, an Australian-based road building firm, saw its shares plummet, falling 60% on their first day in 2008.
Invest with caution
Analysts at Fidelity recommend that investors interested in IPOs exercise caution when investing in newly public companies. The problem is that while many companies garner huge interest in their trading debuts, others generate none.
Also it can be difficult to get value from initial public offerings, no matter how successful they are. The firm points out that sometimes short-term profits can be made, particularly in the case of underpriced IPOs. However, investors who want long-term value may be cheated because the company could have raised more capital in its initial offering if its shares had been properly priced.
As with any investment, it’s always important to do your homework, although this can be difficult with companies that are not yet public because access to their financial information is limited. Fidelity suggests that investors consider opting for a fund or manager that can more easily collect the information that’s needed to make a wise decision about investing in a particular IPO.