IPO Lessons for Public Market Investors

This has been both a big year for IPOs, in terms of high profile companies coming to the public markets, and a disappointing one, since many of these companies have struggled in the after market. In this session, I look at the performance of IPOs collectively, and look it detail at seven IPOs from this year (Levi, Lyft, Uber, Pinterest, Beyond Meat, Slack and Peloton). I draw four lessons:
1. The IPO after-market remains a pricing game, drawing in traders and repelling investors, making mood and momentum the key drivers of price.
2. The initial pricing for IPOs is built on a shaky base, since investors are unclear about what peer group to use in pricing and the past pricing comes from VC rounds.
3. The share count in most young companies at the time they go public and in the months after is in flux, as RSUs and options come into play, making market cap extrapolations dicey.
4. Even though the IPO market is a pricing game, every young company eventually faces what I call a "Bar Mitzvah" moment, where it is asked to show a pathway to profitability. That is why it still makes sense to value these companies, even with the uncertainty about the future.
I value the seven companies on October 8, 2019, and update my investment judgments based upon the comparison to the price on that day.
Valuations

[MattCommins]

It takes a lot of courage to publicly disclose what you're buying. Good luck!

[seeker]

Professor I thank you with the bottom of my heart.... Highly unlikely I will ever get an MBA and you doing social service for people like me... Thank you 🙏🙏

[akashshah]

Fascinating to see Professor putting principles in action. Great job! I am a big fan of your work

[MrConguiano]

great way to end a friday, thanks Damodaran!

[juanochoa]

Excellent Post as USUAL!!. Thank you so much Mr. Damodaran!

[simonweiguny]

Great seeing a value investor like you trying to short an overvalued stock ;)

[LeonardoGuidi]

Professor, You are the best! Thanks to you now I know that IPO stands for "It's probably Overpriced". Regards from Argentina

[josefnavratil]

Great content as always, perfect work, thanks!

[briancrane]

Thanks once again Professor! What fine way to end the week with new thoughts from The Master of Valuation complete with spreadsheets. Many Thanks! [may I suggest a more complex option strategy: option spreads (many others) to offset some of the cost of the option contracts your already own, this limits the profit but if can also limit loss]

[wm]

Awesome! Thank you for sharing your thoughts.

[sapnabagaria]

Great fan of urs... So much to learn from ur videos...

[NotShivekArora]

Brilliant yet humble. Thanks for this video, Could you value Indian Railways next (Not IRCTC)? With the recent plans to have private operators I wish to learn more on the topic. Thanks.

[shivkuma]

Professor, could you also share your thinking about when you sell your positions? Is it based upon a 1- or 2-sigma deviation on the upside from your mean / median value in your monte carlo simulation/distributions.... Also how do you exit option positions - do you roll them over or just hold to maturity ? Shiv

[letsgosean]

Love your stuff Professor Aswath! Applying lots of these lessons to GOHISO.com

[galiaskaraitkuzhinov]

Professor, first of all thank you for sharing this. I have a question: When you calculate Value per share for UBER on the excel spreadsheet (last step), you`ve set Value of Cross Holdings unchanged from t1. Shouldnt we assign some sort of a growth rate for Cross holdings, as the global market is expected to grow at a such a rapid pace (almost tripling in 10yrs) some of the investments in affiliates could also double or triple and this could have a material impact on the share price? or you just kept it unchanged for simplicity reasons? Another thing, the cost of capital is constant for the first 5 years and seems to decline as the company becomes larger. Should we be adjusting our model for interest rate changes as time progresses?


I look forward to hear back from you

[andyy]

Professor, what do you think of FSLY?

[omkarlb]

Thank you professor !!
As once Buffet said, It's Probably Overvalued!

[MultiMojo]

December seems a bit too early for a put option. Food fads usually take a few months to wear off, and Beyond Meat still has positive momentum (with new distribution deals in the works). A mid/late 2020 put option might have a better payoff.

[eduardo.sobrinho]

Beyond Meat is now trading at $118 (October 17 2019). Dinner is on Professor “Deodorant” tonight haha

[madhurgarge]

where can i download your spreadsheets professor?