The IPO Market: Turn Up The Heat in 2010
Although stocks have been volatile lately on worries of slow growth and a struggling global recovery, the IPO market looks to be heating up. Through the first two quarters of 2010, 66 companies have gone public, compared to just 14 in the first two quarters of 2009. Taking a look at the graph below it is readily apparent that the IPO market was absolutely dismal in 2008-2009. But that's changing.
Last week's debut of Tesla Motors (Nasdaq: TSLA) was one more in a string of IPOs that have raised over a combined $9.2 billion year-to-date.
Source: PricewaterhouseCoopers
An IPO occurs when a private company offers stock to the public for the first time. The event is particularly interesting to small-cap investors because most IPO's debut as small cap growth companies. They are tapping into the equity markets to raise much needed cash to spur future growth. That cash can help fuel investments and capital improvement projects that the company desperately needs in order to expand capacity, increase distribution and complete other key initiatives.
BusinessWeek recently quoted Tesla CEO Elon Musk as stating that the yet to be profitable company is expanding "3000 percent" over three years. That rate of expansion is hard to fund with just revenue, especially with a company trying to launch additional products.
Underwriting firms typically help determine an appropriate IPO share price. They also suggest the best time to bring new companies public. As you would expect, most owners (usually company founders, angel investors, and venture capital groups) want to get the most out of their investment, so they tend to go public when the stock market is offering good returns.
The timing of Tesla Motor's IPO may have contributed to its early gains. As the BP oil spill draws more attention to the dangers of oil dependence people continue to seek out alternatives. The promise of electric vehicles offers drivers, and investors, a choice.
***IPOs are noteworthy for small cap investors for a couple of reasons: they can be great opportunities to make big gains, they can give insight into what new technologies are gaining acceptance and they can be an indicator of overall economic health. But they can also be risky investments.
There is no telling which direction a newly public stock will move on its first day of trading. Nor is there stock price history for the company - so technical analysis is impossible for weeks, if not months.
After two brief days of trading Tesla's stock was sharply higher, spiking to near $30 per share. But in subsequent sessions, the stock fell back to around $19 per share where it is trading this Tuesday morning. Early investors who were able to pick up shares at the $17 IPO price are still sitting on a nice 12 percent gain. But like I said, there are no guarantees as to where the stock will go from here.
Renaissance Capital, a firm that tracks IPO's, stated in MarketWatch that through the end of June newly public companies had posted an average share price decline of 8 percent.
Once the initial excitement of being a newly public company subsides, it's back to business for management and employees. And with literally thousands of new owners in the form of shareholders, there are a lot more people to answer to.
***The past few years have been especially tough for the IPO market. After the financial crisis, investors shifted assets away from riskier investments like those with recent IPOs and into safer holdings like U.S. treasuries.
However, times are changing. If the global economy remains strong in 2010, companies will be looking to bring in capital by going public. Many private companies delayed going public in 2009, instead waiting to offer stock in a healthier market. PricewaterhouseCoopers expects small and mid-cap companies to make up the lion's share of IPO's in the rest of 2010, with several deals over $1 billion pending. This will give investors more opportunities to put cash to work.
If you decided to pass on shares of Tesla, you still have plenty of chances to get in on new offerings this year. MarketWatch states that there are 146 companies that are waiting to go public, including a potential IPO of General Motors.
I'll be keeping an eye on the IPO market and will update you as things develop.
