Can you get rich from IPOs? What the hot market means for investors. | MarketWatch Invests

Key Concepts

• Initial Public Offering (IPO): The process by which a private company becomes public by selling shares to the general public for the first time.
• Unicorn: A privately held startup company with a valuation exceeding $1 billion.
• Aftermarket: The trading period for a stock after its initial public offering.
• Lockup Period: A period (typically 3-6 months) after an IPO during which company insiders are restricted from selling their shares.
• IPO ETF (Exchange Traded Fund): An investment fund that tracks a basket of newly public companies.
• Retail Investor: An individual investor who buys and sells securities for their own account.
• Institutional Investor: A large organization that pools money to purchase securities, loans, and other investments.
• Underwriter: A financial institution that helps a company issue new securities to the public.
• P&L (Profit and Loss): A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period.
• Cash Flow: The net amount of cash and cash-equivalents being transferred into and out of a company.

IPO Market Revival and Trends

The IPO market is experiencing a resurgence after a three-year downturn. Following a record number of IPOs in 2021, the market cooled significantly in 2022 due to inflation and rising interest rates, leading companies to remain private longer. However, there's a notable increase in companies preparing to go public, with expectations of 3-5 IPOs per week in the fall and potentially more in early 2026. This revival is characterized by companies with strong cash flow and positive P&Ls, increased corporate and venture capital confidence, and successful aftermarket performances of recent issuances.

Notable IPOs and Their Performance

• Figma: The design software company's IPO saw its stock triple from its initial $33 price, exceeding $100. The company's CEO became a billionaire. Figma's IPO broke a record for first-day gains for a company raising over $500 million, rising 250% on its debut.
• Circle: This fintech startup, which develops and issues stablecoins, set a record in June with significant first-day gains, surpassing the performance seen since Palm's IPO in 2000. Its strong aftermarket performance built confidence in the market.
• Coreweave: The AI cloud computing firm had a lackluster initial IPO but later experienced an explosive rally, with its stock quadrupling. As the first "AI pure play" to go public, its performance was initially unexpected but later surged, possibly due to increased AI hype and media attention.

Opportunities for Retail Investors

While IPOs are generally considered an "insiders game," retail investors have a few avenues to participate:

1. Brokerage Platforms: Some brokerages like Robinhood, WeBull, SoFi, and E*TRADE allow users to request shares at the insider price before an IPO. However, allocation is not guaranteed and often depends on a lottery system, especially for hot IPOs.
2. Aftermarket Trading: Waiting for the aftermarket allows investors to buy shares after the initial IPO. While this means missing out on the immediate "pop," it can still offer opportunities to gain access to transformative periods in a company's public life. Facebook's IPO is cited as an example where waiting and holding long-term led to substantial gains, despite an initial "face plant" where the stock price fell 30% in the first year. However, this approach means paying a premium, as seen with Figma shares costing $85 in the aftermarket compared to the $33 IPO price.
3. IPO ETFs: Investing in an exchange-traded fund that tracks IPOs offers diversification without the need to research individual stocks. Examples include ETFs that hold newly public companies for 3 or 4 years. These ETFs have been outperforming the broader market, indicating the IPO market's health, but they also carry volatility due to the inherent volatility of IPO stocks.

Risks Associated with IPO Investing

• Volatility: IPO stocks can experience wild price swings, especially in the initial weeks and months.
• Lockup Period Expiration: When the lockup period ends (typically 3-6 months), insiders can sell their shares, potentially leading to price drops. Coreweave's stock saw dips around its lockup expiration.
• Momentum Trading: The volatility can fuel momentum trading, making it difficult for investors to time their entry and exit points.
• Insider and Institutional Advantage: Company insiders and institutional investors, along with underwriters, often benefit the most from IPOs.
• Holding Period Restrictions: Some brokerage platforms may impose holding periods (e.g., 30 days for Figma shares) that prevent investors from capitalizing on early gains.

What to Look for in Potential IPOs

When considering investing in a new public company, investors should examine:

• Growing Revenues and Profitability: A company's financial health, including its P&L and cash flow, is crucial. This information can be found in the company's IPO prospectus.
• Valuation Comparison: How the startup's proposed valuation compares to its publicly traded peers.
• Sector Challenges: Understanding the existing challenges within the company's industry.
• Market Strength: Assessing the overall health and momentum of the IPO market.

Future Outlook and Emerging Sectors

The current strength in the IPO market, particularly in tech, is mirroring the recent pickup in new issuances. Key sectors to watch include digital assets and fintech, with companies like Figure, Gemini, and Kraken potentially heading for IPOs. The success of recent IPOs like Figma, Circle, and Coreweave is fueling demand from retail investors and encouraging more companies to consider going public. The fall and the following year are expected to offer numerous opportunities for investors to participate in the IPO market.