For many investors (mainly those ‘newer’ investors), IPO’s often seem like an easy way to make a quick profit. For a number of reasons, the successful IPOs are the ones everyone hears about. The IPO hype machine is strong and has led many to be overly bullish about the idea of investing in IPOs as they charge out of the gate. This is a dangerous strategy, as one can begin to surmise in these initial days of Zipcar’s (ZIP) trading.
On April 13th the world discovered ZIP would price its IPO at $18 per share. This price was $2 above the high end of the initially quoted IPO price of $14-$16. How exciting…$18 per share to get in with ZIP out the gate…sounds great. Not so fast. The quoted price for a share of an IPO’s stock does not mean that the trading will initially start at $18. Yes, some investors with large accounts and the right connections can get in with deal makers Goldman Sachs and JP Morgan, but most of us will have to wait until the stock begins trading on the day of the IPO.
ZIP was a heavily hyped IPO and brought the hype with itself when it hit the exchange floor. The stock opened around at $29.50 (actually it touched $31.5 for a moment). That’s nearly a 64% premium to the quoted $18 per share. From its arrival the stock began to deflate in price. Today, 3 days into its trading history, ZIP sells for $26.36. Anyone that thought they’d get in and make a quick profit is probably starting to panic or in a state of self-denial.
If you’re interested in investing in IPOs, my advice would be to actually think about the business you’re investing in rather than simply dreaming about flipping a stock. What competitive advantage does this business have? What makes the business unique? What are its future growth prospects? Is it led by competent management?
ZIP is a car rental company with a twist. It might be successful, but it’s not a stretch to think that a larger car rental company like Hertz could mimic the service and take away a significant share of the company’s business. What does ZIP have that is going to be a sustainable competitive advantage? If you can’t provide a strong answer, then you probably should not be investing in the company. That means not fooling around with the IPO!
The bottom line is that IPOs are not a sure bet for quick investing success.
Disclosure: No Position