Many people have asked me whether they should try and get allocation for some new tech IPO that's coming out, whether it was Box (BOX), or Etsy (ETSY) or TrueCar (TRUE).
My advice is always the same: Stay away for at least eight months.
In the old days of tech, many companies used to IPO in the $500 million market capitalization range. An IPO was just another step in their financing lifecycle. They had raised private money and now they were ready to raise public money. And if the IPO went well and the stock traded up, the company could count on multiple secondary financings later.
However, in this post-QE, Bernanke world we now live in, tech companies are waiting longer and longer to IPO. Market caps post-IPO for smaller tech issues can be around $2 billion to $5 billion instead of $500 million.
The IPOs are seen as major exit mechanisms for the private investors. These investors have put more money into the companies and are waiting longer to exit. So when the time finally emerges for an exit, it's a rush for the doors. Retail investors be damned.
All this means that it's going to be difficult to find an undiscovered gem that's going to double or triple out of the gate.
Is it impossible? No. There will always be examples such as GoPro (GPRO) or Shake Shack (SHAK). But for every one like that, you'll probably find five to 10 that blow up in your face. Are you smart enough to know the difference? I sure am not.
Let the new issue settle out over the next eight months. By that time, you'll have a lot of the initial sellers out of the stock. You'll also have a few earnings calls under your belt to study how management is handling themselves. Hopefully, by that time, you can find a few bargains on the trash pile to pick up (which of course is rare in this market).
The reward of paying up at the time of the IPO does not justify the risk.