Thursday, 9th May 2019

What is your STRIKE price?

The verdict on this Friday’s Uber IPO is like the narrowly divided Brexit referendum except people will get a chance to vote with their pocket. So it will be illuminating to see how psychology plays out on the first few days of trading. 

There is certain to be fringe derivative traders, hedge funds and the like all jockeying for the best trading positions and placing their bets. The runners and riders are all the different new and existing shareholders including some founders, early and later stage investors, and those who are underweight or without any IPO allocation.  Both the bulls and bears will be out in force attempting to gain the upper hand.

Then there are the millennials who identify with these businesses as integral to their lives and are prepared to take a long view on financial performance, accompanied by the older fundamentalists looking at [lack of] earnings and value investors looking at the [inflated] market cap.

Only time will tell regarding true value of this global brand, as with the FAANGS, some of which were under pressure immediately post IPO but were worthy growth investments over the longer term. Most of these rapidly emerging tech disrupters have yet to be properly tested in a down cycle in the economy. None are absolutely sure of returning profits and dividends for several years. Most report losses as they deeply discount their services to boost revenue growth in order to “blitzscale” their markets or then defend market share. If so, it can be a race to the bottom with ever thinning margins.

IPOs are a a route for founders and early stage investors and employees to realise incredible gains they may never see again. It is no coincidence that some see an end to an overheated bull market (fuelled largely by QE and Trump tax cuts) leading to this current rash of listings.

So on Friday (10th May 2019) we can expect to see a trading frenzy, a massive day of speculation the likes unseen on Wall Street for many years. It could actually dictate overall market sentiment as we move into the Summer and beyond… that time which often triggers the old market adage “sell in May and go away”. 

The lesson most likely to emerge from this major stock market event however is clear evidence that it is a better strategy to invest in these ‘soonicorn’, unicorn and decacorn businesses as later stage high growth private companies at a healthy discount to their likely IPO price.   Those investors with such access have downside protection in the face of bearish post-IPO sentiment from public market investors.

Malcolm Burne is an adviser to the MVP Star Tech NG Fund which invests in “Tomorrow’s IPOs Today”TM