Threats of higher rates are driving down prices of high-growth stocks; two-thirds of 2021 IPOs now sit below their offer prices - According to Report on WSJ.
Well, I feel there’s a reason with every other investment option having a low ROI for a few months. Many hopped onto the stock market, which led to overpriced IPOs and sky-high valuations. If anyone were a co-founder, they would prefer an IPO to have access to cash to expand their business. That’s what had happened.
In the first eight months of the year, IPO shares rose. In November 2021, 's class of IPOs were trading up 12% on average, according to Dealogic. By late December, they traded 9% below their IPO prices.
In IPO stocks, a selloff is underway. Investors are concerned that interest rate hikes expected next year may dampen demand for riskier assets. Nearly two out of every three stocks that went public in 2021 are now selling below their IPO price, reversing a trend earlier in the year.
Well, but what’s the reason driving this change? There are two of them according to investors, bankers and traders.
On the heels of soaring inflation, central banks signalled they would raise interest rates next year, prompting a broad selloff in technology stocks. The allure of many IPOs is that the companies can one day deliver big profits. But they also could flop. Higher available interest rates change the opportunity-cost calculus for investors betting on growth companies’ profits far into the future. When rates are near zero, it may make more sense to pay a premium for the potential of significant future returns. When rates rise, the proposition becomes less appealing.
Top Quote: "While it’s a boon for the bankers to have a record number of IPOs, it’s an environment to tread very cautiously as an investor."
Some significant investors prefer a more subdued IPO performance in the early stages of a company’s life. Portfolio managers at significant funds typically obtain fewer shares in an IPO than they like. They must acquire additional stock in the weeks and months after the IPO to build up their position. If the store doubles straight away, that becomes more difficult.
The Scope for 2022?
The pipeline for IPOs in 2022 is solid, with more than 900 private firms worth $1 billion or more throughout the world. According to attorneys and bankers, several firms planning stock market debuts in early 2022 are re-evaluating the price they are seeking, but few are abandoning their plans.
“When deals haven’t been profitable for investors, naturally they’re going to be more sceptical of the next deal,” said Daniel Burton-Morgan, head of Americas Equity Capital Markets syndicate at Bank of America Corp.
I hope the subsequent IPO you subscribe to yields profitable returns!