Be careful, but latest IPOS are worth look

We use Uber to go places, Slack to chat with co-workers and Pinterest to save our favorite ideas. Why not own a piece of these companies that increasingly dominate our daily lives?

That’s the question for many investors as a parade of well-known technology companies make their stocks available to everyone for purchase this year, not just big pension funds and wealthy people. Lyft was at the head of the line when it had its initial public offering of stock on Friday.

It’s tempting to buy stocks of companies whose products or services we see or use so often. But “investing in what you know” doesn’t mean buying Uber because you request a ride every other day. It means knowing whether Uber will get enough customers at highenough prices to become profitable, and at what level.

“Don’t jump in with both feet just because you use the product,” said Kathleen Smith, principal at Renaissance Capital, which researches IPOS. “You’re not going to know

the value.”

Lyft gave investors a lesson in how quickly a company’s market value can change. The ride-hailing company’s stock surged more than 20% from its IPO price on Friday. But by the first hour of Lyft’s second day of trading, the stock had fallen below the IPO price of $72.

A stumble after a first-day pop perhaps should not have been a surprise, given the track record for IPOS. Here are some considerations if you want to join the IPO rush,

which may include such companies as Uber and video-conferencing service Zoom:

Do IPOS perform well?

Yes and no.

The first day of trading for an IPO is often a great one, when enthusiasm is surging. IPOS have returned an average of 17.9% in their first day of trading, according to data from 1980 to 2016 compiled by Jay Ritter, an IPO specialist at the University of Florida’s Warrington College of Business. That would count as a great year for an S&P 500 index fund.

But IPOS go on to return an average of 21.9% in the three years

after their IPO, lagging the market.

Some IPOS tend to do better over the long term, notably those that bring in more revenue. Since 1980, companies with $1 billion or more in revenue have returned an average of 42.7% in the three years following the IPO. That’s better than the market.

Smaller companies have historically had better first-day gains than the bigger IPOS but go on to return an average 20.2% over three years. That’s well below the market.

What about these IPOS?

While Lyft, Uber and other coming IPOS are big names, many

of them lose money. It’s a trend. Last year, about 8 in 10 companies going public were unprofitable, according to Ritter. That’s the highest percentage since 2000, the height of the dot-com bubble.

To be sure, companies going public today tend to be much more seasoned. Since 2008, the median age for an IPO company has been at least 10 years. That’s roughly double the age of the typical company going public in 1999 or 2000, at 5 or 6.

With greater age often comes higher revenue. Last year, the typical tech IPO made 10 times more in sales than the median in 2000, even after adjusting for inflation, according to Ritter.