Why You Should Wait to Buy Into an IPO

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Dropbox and Spotify both made news with their S-1 filings, but long-term investors will probably want to wait before buying in.

In this Industry Focus: Tech clip, host Dylan Lewis and Motley Fool contributor Evan Niu explain why investing in a fresh IPO is so risky, why it’s better to wait a while to see how things shake out, and what to watch during a company’s first few quarters in the public markets.

A full transcript follows the video.

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This video was recorded on March 2, 2018.

Dylan Lewis: Evan, one last commenter, from someone on Twitter, Wei, hearing that we were going to be talking about an upcoming IPO, said, “Never will Dylan ever buy an IPO offering.” So, I guess people are listening to the old shows, because that goes back to Never Will I Ever Week in mid-2017. I think that generally wraps things up for us. We love doing these prospectus shows. It seems like we always come to this conclusion at the end where, even if the valuation looks great when it starts trading, we want to see several quarters of good results and a sense of how management handles the scrutiny of being a publicly traded company.

Evan Niu: Right. I never participate in IPOs directly, because they’re so risky, there are so many factors, they’re so volatile. I’m in the same boat. I want to see a couple quarters, I want the market to calm down a little bit. A lot of times with IPOs, there’s a lot of hype, and sometimes they drive the price up and maybe it’s not justifiable. I also wait a couple of quarters to let things shake out and settle down before I make any decisions.

Dylan Lewis has no position in any of the stocks mentioned. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.