Uber… Spotify… Airbnb… These companies offer super-popular services and could make great investments for your portfolio. But there’s just one problem: They haven’t had their IPOs yet. In fact, the entire IPO calendar for 2017 is unusually bare. Why is this?
First off, let’s talk for a second about what an IPO even is. “IPO” stands for “initial public offering.” The term refers to the very first time a formerly private company offers its shares to the public via the stock market. And they can hand early-in investors some wild, fast gains. (You might want to check out this article for more lowdown on IPOs and whether or not they’re worth their inherent risks.)
In 2014, there were 304 IPOs — on average, more than one per trading day. But then, in 2016, the number of IPOs slowed to a crawl — only 123. That marked the fewest initial public offerings since the financial crisis of 2008-09 threw the stock market for a loop.
Right now, the frequency of quality IPOs is lower than ever, and a number of companies that are doing well and could complete their IPOs are delaying these events.
At first glance, this seems nuts. After all, companies that want to grow really big need cash from stock investors, right?
Not exactly. Instead, companies are now starting to go a different route.
Uber Prefers the “Patient Money”
Take Uber, for example. For years, analysts have speculated that the ride-sharing company was close to holding its initial public offering. But Uber has repeatedly chosen to raise funds from a limited number of investors rather than offering its shares to the public.
Traditionally, a private company will raise cash through three or four rounds of investment from a few different venture capital firms and then go public. But Uber has taken a different direction.
The company has had at least 14 rounds of financing, including investment from private equity firms and debt financing led by major financial firms. Uber has received money from major venture capital firms; corporate investors such as Google, Microsoft and Toyota; foreign government investment funds like the Qatar Investment Authority; wealthy individual investors, including Jeff Bezos; and even some celebrities like Britney Spears.
Unlike everyday stock investors, many of the people and institutions funding Uber may have an investment horizon of 10 or 20 years… or more. Among investment circles, this is known as “patient money.” And it keeps less patient investors like you and me out of the game.
In total, Uber has raised approximately $11.5 billion of funding without needing an IPO. To put that in perspective, the largest IPO in 2016 raised a mere $1.4 billion.
The IPO Calendar Offers Fewer Opportunities and Greater Risk
And unfortunately, Uber is not an exception. This is becoming a new norm. A number of companies have delayed their IPOs well beyond the typical timeframe, given their relative size and success. Investors continue to eagerly await IPOs by companies such as Houzz, Lyft, Airbnb, Qualtrics, Palantir Technologies and Spotify — some pretty well-known companies that investors would love to have the chance to get into.
The combined effect of these delays is a relatively low number of IPOs to choose from, and in general the companies that have held their IPOs are not of the quality of Uber or Airbnb. This limited supply means that investors must chase fewer opportunities with very high price volatility as the frenzy to get in, and get out, of the IPO shares unfolds in the early hours and days of trading.
How to Find an Attractive IPO
So how will you know when a great IPO investment opportunity is going to present itself? The major exchanges have posted their IPO calendars. You’ll find the Nasdaq’s and the NYSE’s here.
If something looks tempting, go to the U.S. Securities and Exchange Commission’s EDGAR website and search for the company’s filings (Form S-1 and S-1A updates). From these filings you can learn about the company’s business, check out its financials, and make your decision.
Then log onto your stock trading site (check out our favorites here) by 9:30 a.m. Eastern Time. (You can also place an order even before trading opens.) Just remember to hang on for a wild ride.