The long-awaited, eagerly anticipated Uber (UBER) IPO is upon us, and with it comes a plethora of historical comparisons.
"Biggest since" and "most hyped since" are common phrases this morning, along with several others that attempt to put this offering in some historical perspective. That is all very interesting, but the only history that should concern investors is that which gives us clues as to what UBER will do in the near future.
Obviously, every stock, and therefore every IPO, is different. Or, to put it in the jargon of financial advisors, past performance is not necessarily indicative of future results. One would think that the vagaries of initial pricing would make that even more true when it comes to initial public offerings than in any other situation, but history shows that there is a remarkable similarity in the post-IPO pattern of stocks, particularly those of the high-profile tech variety.
Hegel once famously said that “we learn from history that we do not learn from history” and that seems to apply as much to the supposedly data-driven world of finance as it does to the more emotional field of politics. All of the recent IPOs to which Uber is being compared show the same pattern after the launch, and it is a pattern that amply demonstrates Hegel’s point.
Uber stock has been priced at $45 this morning. That is near the low end of the expected range, but still high enough to make the offering worth over $8 billion. That makes it the largest US deal since Facebook (FB) raised $16 billion in 2012 or, for the more internationally minded, Alibaba (BABA) raised around $25 billion in 2014. Outside of tech, but comparable in terms of hype, Visa (V) offered around $18 billion in stock at their 2008 IPO.
The charts for the early months of trading for all those stocks show a distinct pattern:
As you can see, in all three cases, the stock initially traded higher than the offering price, then climbed for a short time before pulling back, only to recover again. The timing differs, but the pattern is constant, and this is where Hegel’s words of wisdom come in.
Each time there is a much-anticipated public offering, it is over-subscribed. That is no accident. It is what the investment bankers who run the process aim for. It gives a good look to the offering company, as well as maximizing the return for existing shareholders and early investors.
That over-subscription creates demand in the early days of public trading, when supply of the stock is inevitably limited. Some people participate in the offering to flip their holding and make a quick buck, but the majority hold on to their shares, which forces the price ever higher.
Eventually though, that dynamic fades and reality intrudes.
Early earnings and other numbers rarely match the hyped-up expectations of a newly public company and before long the market remembers that the investment bankers who price these offering know what they are doing.
Their valuation of the company is usually pretty accurate, so the massive premium to that valuation represented by the initial pop in the stock is not justified.
At that point, the stock drops.
Still, in most cases, the hype was there for a reason. The company really did have massive potential and as that becomes realized the stock recovers, usually way past the previous high.
The lesson from history is clear: If you believe in Uber and missed out on the $45 initial offering price, wait. There is no guarantee that UBER will be lower than that before long, but it seems it is more likely that this will happen than not, based on history.