Should IPO investors worry about first-day performance?

Uber needs a lift. Much attention has focused on its stalled entrance to public markets, with its shares falling almost 8 per cent below their offer price on their trading debut.

Initial public offerings are typically priced to pop, yet Uber’s first-day performance ranked as the eighth-worst for a US IPO raising more than $1bn. After the much-anticipated listing of a star “unicorn”, the company is so far performing more like donkey.

But a one-day pop tells us very little about the future.

Using figures from data provider Dealogic, the Financial Times analysed all IPOs in the US raising more than $1bn since 2000 and found that the direction of first-day movements was no guide to future performance.

In each quartile of first-day changes, there is an even spread of stocks with negative and positive lifetime performances.

Shares in Facebook, which barely moved from their offer price on their opening day in 2012, has since risen fivefold.

Chinese courier company ZTO Express in 2016 suffered the worst opening-day fall in US markets history and its shares still languish below their offer price despite a $1.4bn investment from Alibaba.

By contrast, German chipmaker Infineon Technologies soared 127 per cent on its launch day but it is now trading at about half its offer price after warning of weaker Chinese demand for its chips.

So why is there so much attention on first-day pops?

Research by University of Florida professor Jay Ritter may provide an answer. He discovered a stronger relationship with a company’s first-day pop and its subsequent performance over the next 12 months.

Prof Ritter, who analysed more than 1,800 US IPOs between 2001 and 2017 from a full spectrum of companies not limited to $1bn fundraisers, found stocks with negative first-day moves underperformed a basket of equivalent stocks by 6.3 per cent on average a year. Those that finished their first day flat, or higher, outperformed similar stocks by 2.3 per cent each year.

“There is a reason that some of the smart money decides to immediately dump an IPO if it trades down on the first day,” he said. “There tends to be some momentum in the first year.”

And after Uber’s debut caused such a stir, it will only get more interesting when the end of the lock-up period in November allows more shares to hit the market.




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