Reddit is creating quite a buzz this week, set to be the first social media IPO since Pinterest went public in 2019. IPO stands for initial public offering and means the company is transitioning from a privately owned to a publicly traded company. IPO’s represent a great deal of excitement for investors who are looking to “get in early” on the next multi-million dollar stock venture.
For example, Apple’s initial public listing was in December of 1980, selling for just $22 per share. Amazon went public in May of 1997 selling for $18 per share. Both of these company’s have done remarkably well in the decades since, and if you’d invested just $1000 in either of them, today you’d have about $1.26 million for Apple and about $1.5 million for Amazon, making it easy to see the appeal of an IPO.
But Apple and Amazon are by far the exception and not the rule. Consider Pets.com. After it’s initial public offering in February of 2000, Pets.com garnered investor trust and raised $82.5 million, only to declare bankruptcy 9 months later. And Vonage, an alternative phone and messaging carrier, listed initially at $17 per share, but with prices eventually falling to just $.50 per share. In 2020 Vonage was bought out by Ericsson for $21 per share, falling far short of the dreams of its early investors.
Despite listings like Apple and Amazon, IPO’s are generally higher risk investments; they have not yet traded on the stock market, no one really knows how well the stock is going to perform, and they often do not have a long financial track record. These make it difficult to evaluate intrinsic value, historical performance, and estimate future prospects.
Once a company like Reddit goes public on one of the US stock exchanges the company will also appear for the first time on the DYF website. But without a significant amount of historical data, evaluating past performance and company fundamentals is difficult. Since a hallmark of value investing is managing risk by evaluating those historical fundamentals (the DYF score) and understanding the fair value estimate, IPO’s do not generally represent value opportunities, particularly for the beginner investor.
Unlike many IPO’s who are often newer, less established companies, Reddit launched back in 2005 so has a fair amount of historical data. If you have access to that data, know how to calculate intrinsic value and evaluate past performance, Reddit may be worth the time to investigate. But for many a patient value investor, waiting until a company has a solid trading history to better estimate fundamentals and intrinsic value is often the safer play.
If you’re interested in joining the Ditcher Community and taking advantage of the DYF Investing website, click here.
