IPOs have been sizzling-hot this year. And while not all IPOs have made investors rich, many have recorded astounding gains for shareholders.
Twitter, Inc. (NYSE/TWTR) was only one of many IPOs that returned riches to its investors. Priced at $26.00 (already well above its initial $17.00–$20.00 range), the stock surged to open at $45.00 last Thursday and traded at $50.00 by mid-morning. (Read my take on Twitter in “How Small Investors Can Still Get a Piece of Twitter.”) It’s amazing the riches that can be made from 140 characters of text. With the surge, Twitter was valued at over $26.0 billion, which is astounding for a company that has yet to figure out how it’s going to monetize its user base.
Two other recent IPOs that also showed crazy moves include box and packaging company The Container Store Group, Inc. (NYSE/TCS), doubling from its $18.00 IPO price, and Chinese e-commerce classifieds web site Beijing 58 Information and Technology Co., Ltd. (NASDAQ/WUBA), or 58.com, Inc., up over 40% on its first day.
Some of the quick and somewhat obscene gains recorded by some of the IPOs remind me of the situation in 1999 and early 2000, when companies with very little in terms of fundamentals or history staged stellar IPO gains after being welcomed by anxious investors.
We are not at the same degree of obscenity now as back then, but the gains I’m seeing today are ridiculous. (Maybe it’s because I’m envious about not getting any pre-IPO shares.)
Now, the rapid ascension of IPOs and the broader stock market, especially in the Internet services area, is sounding off some warning bells in my head.
It’s too much, too soon. I was convinced the stock market was set for a bigger correction than we saw recently when the S&P 500 corrected about six percent.
The major correction in the S&P 500 has yet to materialize, but I still believe it’s coming; I’m just not so clear on when. Maybe it will happen when traders realize the economy and corporate revenue growth aren’t growing at a pace that the rise in the stock market this year would suggest.
The bottom line is to enjoy the grandeur of the IPOs market, but be aware that the frenzy we are seeing is an indication of some of the froth that is surfacing in the stock market. It may be time to take a step back, take some profits, and enjoy your gains.