IPOs - Things to look for
It's easy to get caught up in the excitement surrounding an IPO. That is what the company is trying to do - encourage investors to buy the stock - they want your money!
Here are a few things to consider when deciding if an IPO is for you:
|Proftability||Warren Buffet, one of the most successful investors in history says, "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - and by wonderful, he means profitable. If a company has a history of profitable operations, how likely is it to become unprofitable with more money?|
|Long-term Growth Potential||
Is a company able to continue to grow? For example, one recent IPO had already signed almost 10,000 customers, which is exciting! However further analysis showed that there was only a total of about 25,000 to 30,000 possible customers in the country, which means that if the company was able to sell to every single customer, it could only triple in growth.
Compare this to a company like Starbucks (NASDAQ: SBUX) or Dunkin' Donuts (NASDAQ: DNKN) which can open many more locations, or Walmart (NYSE: WMT) which can expand and offer a wide array of products.
|How is the money to be used?||What is the company going to be using the money for? Typically companies use the influx of money (in some combination) to reward employees and executives, pay off loans (retire debt), invest in operations, acquire other companies. A company that is using more investor's money to retire debt and pay employees and executives is paying for past performance, compared to a company that is using the money to fund future growth (and hopefully, revenue!)|
Some people are better at starting small companies than running big ones. Steve Jobs is an excellent example - an innovator second-to-none, but he had difficulty in his first tour at Apple. Is management up to the task of handling a large company? What is the reputation of its management (a brash CEO may make for exciting headlines - until he gets sued). A good company has a good management team.