2024 Has Seen Some Big IPOs, but Are They Worth It?
Last month, financial media couldn’t stop talking about two initial public offerings. The first was the incredibly popular, user-moderated social network Reddit (RDDT), which boasts 850 million monthly users.
Founded in 2005, the company has seen its valuation explode from $500 million in 2014 to $5.5 billion a decade later. But in its nearly 20-year existence, the company’s never been profitable.
The second was Trump Media & Technology Group (DJT), whose debut was labeled a “Trump and dump” scheme by critics amid his ongoing legal battles and his very public financial struggles, resulting in him huckstering Trump coins, NFTs, tacky sneakers and now Trump-branded bibles (just like Jesus would want).
Without going into detail, we expect all of the above to go the way of Trump Steaks, Trump University, Trump Magazine, Trump’s casinos and the Trump Shuttle airline. If you’ve never heard of any of those, that’s because the self-proclaimed “genius” has driven them all into insolvency.
DJT, which owns Trump’s far right propaganda outlet, Truth Social, was brought public by a special purpose acquisition company. The former president controls 57% of the shares, and shortly after its IPO, it was disclosed that the company nearly ran out of money last year after posting a $58 million loss.
But even when the writing’s on the wall, loyalists, poorly informed investors and YouTube day traders jumped at the chance to grab shares.
Popular ≠ Worthwhile
IPOs are regaining momentum this year after the Fed’s interest rate hiking cycle muted efforts in the recent past. And while nobody expects this year to top the record 1,035 companies brought public in 2021, numbers have been robust since the start of 2024:
But going public isn’t a guarantee of short- or long-term success. Here are some unsavory facts:
- The share of companies that were profitable after their IPOs peaked in 2009 at 81%.
- In 2020, only 22% of IPO companies were profitable afterward.
- And in the past two years, that figure’s slightly risen to 34%.
So why, then, do enthusiasts talk about IPOs like they’re the secret to financial success? For one, many were spoiled by the massive and since-unmatched gains of Big Tech companies in the early 2000s.
But looking at the performances of some companies that’ve gone public since 2023, the results are mixed:
From that table, the motto for IPOs should be, “Throw sh*t at the wall and see what sticks.”
Another reason people believe IPOs are great investments: They don’t understand …
How IPOs Work
When people hear “IPO,” they assume that means the day the company goes public and retail investors — like us — can purchase shares.
That’s not how it works.
Shares of IPOs are reserved for institutional and accredited investors, meaning unless you’re an investment bank or, in the case of accredited investors, have an SEC qualification based on a consistent income above $200,000, a net worth of $1 million or hold a credential like a Series 7 … you can’t get your hands on true IPO shares.
As George Carlin said:
By the time average Joes are able to purchase shares, the “smart money” has often already grabbed their gains and left the scraps behind.
That’s what happened with DJT. The day it was listed, Trump and his cronies already made billions on the IPO. Then, when shares careened in late March, retail investors were the bagholders.
After skyrocketing out of the gate to the tune of 79%, shares of DJT plummeted 25% the following day. At the time of writing, it’s down 36% from the high it hit on day one. The story’s the same for RDDT, which rose 42% then fell 30% over two days.
The Takeaway
Investing is highly subjective. Some people prefer the growth potential of tech. Others enjoy the relative safety of dividends. Some invest in crypto or alternative assets.
No matter what your preference is, the most important part of investing is being informed. IPOs are inherently risky. The majority aren’t profitable after debuting and some — like Reddit — aren’t profitable prior to going public.
Nobody should embrace “throw sh*t at the wall and see what sticks” as a central thesis of their investing strategy. Leave that to gamblers.