Rivan (NASDAQ: RIVN) The stock recently dominated the headlines with its lively IPO. However, there are some good reasons for investors to oppose jumping into the stocks of a newly listed company.
In this video clip from “The 5” recorded on November 9th – Before the stock started trading – Trevor Jennewine, Zane Fracek and Demitri Kalogeropoulos discuss why IPOs are often overpriced and why it might make sense to look at a company’s first public earnings reports before taking a position in stock.
Trevor Jennewine: Rivian’s IPO is expected sometime this week. The manufacturer of electric trucks plans to raise around 10 billion US dollars and sell 135 million shares. They recently raised the IPO price to $ 72-74 per share. On a fully diluted basis, that would put the company at -proximately $ 65 billion. For reference if Tesla went public in 2010, the company went public with a valuation of less than two billion, and in the past decade only two companies have raised more money from their IPO than Rivian intended.
That would Alibaba and Facebook. There are many reasons why investors are excited about this company. Amazon owns 20% of Rivian, and the retail giant has already ordered over 100,000 electric vans due to be on the way by 2030 to support last mile delivery. I think Forward also owns a 12 percent stake in Rivian. I still have a two-part question. The first is how you -proach IPOs.
Do you usually wait or do you feel comfortable jumping in right away? Does it depend on it? Zane, let’s start with you.
Zane Fracek: I usually wait. I think the guy learned that from The Fool. Honestly, I think waiting a bit is generally a foolish investment practice, but I got really interested in David’s Airbnb recommendation recently. That goes against the green, but if you are really confident it can be a way to make oversized returns in the market. But I’ve also been very focused on leadership within the IPO.
Because for the management team this is the end if they want to take it with them when they go public. I wanted to see who could hold out through the complexity of the IPO process, who would continue to hold most of their shares. This is mainly because I haven’t even set my own investment thesis about the company in stone. When it’s so new, it takes me a long time to work through all of the information and to think about specific things. So in summary I am waiting.
Demitri Kalogeropoulos: I’ll be there with Zane too. I like that point about the administration. It’s a good opportunity to see how management reacts. It’s a big change in the company.
But I usually avoid going public because we as investors are more likely to have opportunities in this situation than in others. Mainly because prices are almost always higher than we would normally pay, because the company can decide for itself when to go public and you don’t hear about IPOs in bear markets or bear markets.
They only h -pen when we’re in a big bullish market in the year and that makes sense. These companies want to raise as much money as possible, but that also means I have to be a little more careful because it’s easier for me to overpay in this situation. On the other hand, there is always so much interest in the hype and press when going public. Everyone likes to watch the stock price on that first day, and such an environment is also a dangerous time to invest in, in my opinion, because there is just crazy volatility and you can lose a lot quickly.
The third thing is just that I don’t usually have a great track record to look at, I’m a huge dividend fan and like dividend aristocrats, these are stocks that have at least 25 years of constant dividend growth and you can look at what a company has been like for a long time down. It’s about any retail environment you can think of. But on an IPO, you’re lucky enough to see a couple of years of good data, so as an investor you’re a bit more disabled than usual and that’s why I like to wait a couple of years quarters if I can. It’s not that I’m not interested.
I will pursue an IPO. There are a lot of really exciting companies coming out. Rivian is a great example too. I used this strategy on Facebook when it went public in 2012, I just looked at it and then over the next year, 2013, I made some investments and since then I’ve held the stocks and it’s up 700 percent over that time so it worked out fine.
Jennewine: Yeah, I’ll be on the side of you two. I tend to wait for the IPO and the SPAC show the other day. Danny Vena mentioned that companies have a choice when they go public, and that doesn’t mean that everything isn’t right in the SEC filings, just that they can pick the right moment.
Maybe they can cut the spend on something here over there and make certain numbers look a bit better than they could be if we’re targeting growth, and so I usually want more data, at least a couple of quarters, three quarters, or as a public company Looking back just to get a better sense of the potential.
That being said, every now and then I can’t remember one, but every now and then I think I’ll get in earlier if I’m particularly excited for a company with a very small position.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, h -pier, and richer.