Australian economists claiming Aus consumer sentiment fully recovered from pre-covid. Either they’re wrong or people are far more resilient and/or ambivalent to debt than I anticipated.
How does the general public get screwed by an underpriced IPO? It’s 100% insiders getting screwed, which probably means they aren’t actually getting screwed.
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Several different factors may explain why the underpricing of IPOs has long been a pervasive phenomenon. First, both issuers and underwriters face very high liability under the federal securities laws if the stock price in an IPO declines below the initial offering price. For this reason, they may consider it safer to underprice the offering to a degree in order to avoid the special standards of liability that apply to registered public offerings.
Second, both the issuer’s management and the underwriter may face conflicts of interest that lead them to knowingly accept underpricing. Obviously, the more the offering is underpriced, the more valuable the IPO allocations become and the more the underwriters can demand that institutions use their brokerage services in return for them. For the issuer’s management, the conflict is more complex and lies in the fact that they typically cannot sell their own shares in the company until six months after the IPO. Almost uniformly, underwriters negotiate a “lockup agreement” under which insiders (both management and venture capitalist shareholders) agree not to sell any of their shares until the expiration of a six-month lockup period that begins on the offering date. This both assures investors that management is not “bailing out” of the company and also intensifies the first-day price spike (because in the typical case the insiders own a majority of the stock and thus the lockup substantially restricts the short-term supply of stock available in the secondary market). Given that its own stock is locked up, management’s personal focus may be on the likely value of the stock in six months time when they can sell their own shares. Both the conventional wisdom and the empirical research holds that a sharp first-day price spike is the best means of maximizing this later value because it creates a momentum in the stock’s price that builds up to the lockup expiration date. That is, the greater the first-day price spike, the more that the firm will attract the attention of securities analysts and maximize its share value as of the end of the lockup period. Nonetheless, from a public perspective, the social price of benefitting management in this fashion by intentionally underpricing the stock is that the firm raises less capital and at a more expensive cost.
https://www.pbs.org/wgbh/pages/frontline/shows/dotcon/crying/coffeeipos.html
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And the insiders don’t get screwed hard, typically only 10% of the company is in the IPO.
Yeah, IPO pricing is so weird that academic finance literature officially views it as a “puzzle”. (Other official puzzles are the excess volatility puzzle, the equity premium puzzle, and the post earnings announcement drift.) Researchers have been looking at it since at least 1975, and you could have gotten tenure at an Ivy League finance department if you had done nothing but write 6-8 papers speculating about different factors that might lead to underpricing.
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I think it’s impossible to solve. The public is often willing to pay wayyyy more than institutional investors who can otherwise access these things pre-ipo.
Also @anon38180840 a lot of times you’re better off waiting a few days. I don’t touch IPOs but if I really wanted exposure I’d buy the IPO ETF. They do all the heavy lifting of tracking the index and adding/selling companies as they come to market or go beyond 2 years as a publicly traded company.
How do you rate Google’s Dutch auction IPO, where the public and institutional investors had equal access?
This is what I’ve been saying in this thread since it started!
Makes me consider buying some GM but they’re already at an all time high.
I’m not arguing with your point! This thread just fleshes out the idea in more detail.
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Because they don’t have access to the lower prices. Only the uber uber VIPs do.
Well to be clear the plan is to buy at open and sell later in the day. These tech ones in particular have been surging, I’m less interested in having exposure to all IPOs. But I’ll research that ETF for the future, thanks!
Before I became a predominantly vanilla index investor, I did try this with the Facebook IPO. It did not go well.
IIRC, it lost over 50% of the IPO price over several months before it started stonking.
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Yeah I don’t think this is a good strategy broadly, but in the current climate this year, I think the overwhelming likelihood is some hardcore stonking tomorrow for these two for hilariously inconsistent reasons.
Right, but if the company prices the IPO higher, the general public still doesn’t get to buy the stock at a discount. The initial IPO buyers (insiders) would just pay more to the company (owned by insiders pre-IPO) for their shares. The general public isn’t part of the transaction.
$132B for the capacity to produce 10M vehicles annually is pretty expensive, especially since you’d need a ton of additional capital investment to retool for EV production. And a ton of your workers would be building useless things like engines and clutches and transmissions. And they would be expensive to fire because they have good union contracts. And they’d be tied into vastly more elaborate OEM networks than Tesla uses. And they’d inherit a bunch of awful dealer networks.
Why not just raise $100B in cash and build a bunch of greenfield factories? It takes longer, but we’re living in a time of ultra-low discount rates, so it’s not a big deal. By the same token, GM’s ICE business is valuable while carbon regulations are lax, but it’s not viable when regulations are stricter, and they’re probably going to get stricter (globally even if the US lags). It’s funny that the thread has a dig at the 10-figure carbon credit payments flowing to Tesla as “temporary.” In reality, those payments are the first tangible manifestation of the upcoming transition in which the ICE industry is going to be fully or mostly shut down, to the benefit of EV industry. Carbon standards are not going to get laxer in the future. The only way legacy auto gets out of paying Tesla even more for emissions credits in the future is to stand up their own internal EV businesses that sell enough to clear the regulatory liabilities of their ICE businesses.
As the preceding suggests, it’s misleading to view Tesla and GM as being in a singular “cars” business. Tesla is in the EV business, most of GM is in the ICE business, and a small part of GM is in the EV business. The ICE business is basically coal mining–profitable now, but essentially in early run-off mode due to the associated and growing regulatory liabilities. (And remember, ultra-low discount rates…) You can imagine retooling your ICE business to be an EV business, but is that really more plausible than shifting from coal mining to iron-ore mining? I would wildly speculate that >50% of the value of an ICE car comes from components that don’t exist in an EV and vice versa. Is it really worthwhile (from the owners’ perspective) to try to do that retooling rather than simply sending the ICE business into bankruptcy when the time comes?
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ICE cars, at least in the US, are nowhere near the end of their life cycle based on the political climate here. 4-8 years of Biden won’t meaningfully alter the landscape. You also saw that fossil fuel production here was a large issue in the debates with fracking being a buzzword. We are a long way from moving on from fossil fuels being a viable political position in this country.
Eventually it is coming but I would be absolutely shocked if companies aren’t selling new ICE vehicles in the US in 2030. The fossil fuel industry needs ICE to be viable and they still have a ton of political power.
How that pertains to TSLA I am not really sure other than to say 10+ years of a similar environment for vehicles here in the US gives TSLA competitors a ton of time to ramp up EV production. The reason why TSLA acquiring one or more of their competitors makes sense is it being one less entity to compete against more than it being some wonderful synergy.
Right, but the public is completely closed out of a chance at a bargain and it goes to people who are already very very very very wealthy. At least if it was sold at a fair price initially, the insiders wouldn’t be printing so much money for themselves.
My wife joined a company about a year before their IPO, she was given RSUs and options with a strike price of like $4 per share. Their IPO opened around $20 and was in the upper $20s at the end of the first day. I don’t know how the strike price is determine for options like that, must be some kind of valuation thing done well before the IPO but it was like you said, literally just printing money for all of the employees who received them. Some of the OG employees went from being regular middle-upper management types to 8 figure wealth