Wednesday Wealth Recap
- The U.S. is racing toward herd immunity and a robust reopening of the economy. But there are still risks on the horizon. Alexander Green explains why now is a good time for a portfolio check.
- There are tons of vague sayings around Wall Street on how to invest well. But how do you know which rules to follow? Nicholas Vardy shares three time-tested investing rules for better returns.
- Bitcoin has been hitting new highs lately, but that doesn’t mean CEOs should be purchasing billions of dollars’ worth of the cryptocurrency. Marc Lichtenfeld’s take? “It’s simply irresponsible.”
IPOs – aka initial public offerings – are on fire.
In 2020, 480 companies went public on the U.S. stock market. That’s double the number we saw in 2019.
And these companies are not debuting at modest valuations.
Take Palantir Technologies (NYSE: PLTR), for example.
Founded in 2003 by Peter Thiel and four others, Palantir specializes in gathering and analyzing data. The U.S. Central Intelligence Agency was one of its earliest investors. And, for a while, the CIA was Palantir’s only customer.
Over time, the company added more government agencies and some private companies to its customer base. And when Palantir finally went public on September 30, 2020, it was one of the most valuable companies in America.
On its first day of trading on the New York Stock Exchange, it was worth more than $15 billion.
In contrast, Microsoft (Nasdaq: MSFT) was valued at less than $700 million when it went public in 1986. And Amazon (Nasdaq: AMZN) was worth around $440 million when it IPO’d in 1997.
In short, IPOs are getting bigger and bigger… as are the profit opportunities for IPO investors.
IPOs are a sort of proving ground. When a company goes public, it launches into an exciting and challenging new phase. It moves from the shelter of a private enterprise with a limited number of investors to the scrutiny of the public markets.
It’s not for the faint of heart.
But when these companies succeed… the gains are incredible.
Over the course of 2020, 54 IPOs gave their investors triple-digit gains. And as a group, IPOs outperformed the S&P seven times over.
Institutional investors are all over this trend. JPMorgan Chase (NYSE: JPM) recently invested in a private stock trading platform to bolster the bank’s efforts to connect pre-IPO buyers and sellers.
According to Andrew Tuthill, JPMorgan’s head of private market equities, this investment is the first but likely not the last of its kind for the bank.
In the six months since JPMorgan started trading the stock of private companies, the order flow and demand have roughly doubled every month.
“It’s been a big growth area for the firm,” Tuthill said.
JPMorgan has joined a growing crowd of investors – both institutional and individual – cashing in on an era of unprecedented American innovation. And tech IPOs are the biggest fish to catch.
As Alexander Green wrote last fall…
Technology is built on ever-increasing computational power.
Processing efficiency has improved by orders of magnitude in the last 30 years. Since 1990, it has increased by a factor of 100,000.
These trends are leading – almost inexorably – to a more prosperous society and a wealthier world.
As an investor, you want to capitalize on this.
An Unstoppable Surge
It’s easy to see why companies are betting big on IPOs.
For one, the IPO market is exciting. These are innovative companies run by plucky and passionate founders. They’ve got new ideas and fascinating stories. They have a vision for making the world a better place.
And investors want to be part of it.
It’s decidedly more exciting than investing in Coca-Cola or McDonald’s.
Tech IPOs are especially tantalizing. After all, advances in technology are happening at explosive rates.
Every day, people send billions of emails… upload millions of photos to Facebook… and stream millions of hours of content on Netflix. All that data has to be collected, managed and stored. And new tech companies are racing to get the job done.
The IPO market is also massively profitable. According to Axios, IPO investors made more than $50 billion last year.
Palantir rose 231% in the two months following its IPO. Lemonade (NYSE: LMND), an online and mobile insurance company, returned 322% in six months.
And the record surge of IPOs we saw in 2020 shows no signs of stopping. In January 2021 alone, the Nasdaq added 91 companies with a 76% overall win rate.
We’re just scratching the surface of the IPO iceberg.
So keep a close eye on this market. You might just find the next Amazon.