Get ready for 2018 IPOs

November 15, 2017 - John Osbon (3 mins to read)

Gaze at the most likely IPOs for 2018, some well known and others not. Should you invest in any of them? If you do, get ready for a wild ride. The total US stock market size is shrinking due to buybacks and takeovers. (WSJ). Private companies are being acquired before the public can invest in them. What’s the response? IPO!

Why go public?

Companies go public for three main reasons. First, a company goes public to generate cash for early-stage investors that want their money back and a return on their capital. Early stage investors get their money in an IPO “exit strategy.”  Next, a company goes public to create currency to buy other companies. Buying Company B with public Company A stock is the cheapest, non-cash way to grow. Finally, a company goes public to broaden and stabilize its investor base.  The public company wants a loyal, attentive educated investor base of institutions and individuals whom it then rewards with dividends, buybacks and appreciation.

You may hear another reason from time to time, but it doesn’t make my list. Forgive me for being skeptical but I don’t believe a company goes public so “anyone can invest in the American dream.”  That may be a byproduct but it is not a motivator.

Who gains in an IPO?

The early investors get the greatest tangible return from an IPO. That may include the founders and early employees but it is predominantly the institutions that funded the company’s growth while it was private. With few exceptions, founders end up with 20% or less in an IPO. The stories of instant unimaginable riches in the billions, like Zuckerberg, are exceedingly rare.

My top five picks

I expect that three of these five companies will go public in 2018. Listed in alphabetical order along with their profitability, they are:

Airbnb – Most people have used this house and room rental service at least once, probably for a vacation. Many people also use it to generate extra income. Profitable company for the last 18 months.

Aramco – Owns all the oil in Saudi Arabia, the largest single stockpile in the world. Expect no ownership rights at all if you invest. Saudi Arabia is a monarchy and Aramco is the crown jewel. Extremely profitable.

Dropbox – Cloud storage for all your information.  Osbon Capital has used the secure business version since 2012. Profitable.

Uber – Your own driver and car when and where you need it.  Controversial company. Uber provides jobs to hundreds of thousands of drivers. Softbank is investing $10b for a 14% stake. Unprofitable.

WeWork – Shared workspace for the millennial crowd. Not our cup of tea due to the kegs and the chaos. Massively leveraged, profitable if it keeps growing.

Note: there is a good case for using the services of IPO and pre-IPO companies because they are often content to lose money as they grow. As an alternative to investing, consider using the services of the company. When a service provider is willing to take a loss to attract you as a customer, it usually means an artificially low price for you. It worked with Amazon and Netflix. I suggest you use Uber because they are subsidizing 30 cents of every dollar you spend on rides.

Should I invest?

You may want to put some money into an IPO, but I wouldn’t call it investing. IPOs should be treated as speculative bets — you may snag a winner. Few IPOs turn out like the famous rags-to-riches launches you may know. The big successes rarely start out that way. FB dropped 50% in its 2012 IPO year. You couldn’t give GOOG away in 2004.  AMZN, a 1997 IPO, went from hero to near zero and back again.

How much is too much?

If a complete loss of your IPO investment would cause you real pain, you’re committing too much money. Invest only what you can afford to lose, be patient and hope for the best.

Research shows that only 1/3 of investors are currently comfortable with their investment portfolios. If you’re interested in a free performance review, click here.



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