I have been going back and forth deciding if I should play the upcoming IPO, Zynga (anticipated ticker ZNGA). Not because I think it is a great value or will do well long-term, but because there is an opportunity and trend presented in the first day of trading. It is something that would have to be watched like a hawk to determine how it will trade and when to get out, but definitely on the same day and setting a stop if the loss is 5% to minimize the risk. I think many are expecting a pop and drop. I wanted to see if the recent past indicates if it is that easy. What happens with a lot of these "hot" IPOs is that there is a lot of interest in them, but end up starting out on the market severely overpriced, which gives the opportunity for a quick trade to get in and out on the first day of trading. Here is a recent look at the trading action of some recent "big" IPOs when they began to trade and also why it is best to sell and forget quickly.
LinkedIn Corporation (LNKD)
|May 19, 2011||83.00||122.70||80.00||94.25||30,151,000||94.25|
Highest Possible Return on Opening Day: 47.8%
This set up perfectly for a quick trade and allowed for some to be taken off the table on the way up and get fully out on one day with a great gain.
52 Week Low: $55.98(33% loss from opening day starting price)
52 Week High: $122.70(on opening day)
Current: $65.95(20.5% loss from opening day starting price)
Obviously, those that bought after the open on the first day and held, lost even more.
Market Cap: $6.43 Billion
Forward P/E: 200+
meaning it was that much more overvalued when it began to trade. Growth is expected to be good though, which is a plus, but it still goes to show that it should not have been trading at the initial prices or even trading at the current price per share as it will take many years for the growth to catch up to that multiple to make it reasonable.
Pandora Media (P)
|Jun 15, 2011||20.00||26.00||17.35||17.42||42,152,400||17.42|
Highest Possible Return on Opening Day: 30%
52 Week Low: $9.15(52.3% loss from opening day starting price)
52 Week High: $26(on opening day)
Current: $10.22(48.9% loss from opening day starting price)
Again, those that got in right away and for a longer term period, the result was much in the same.
Market Cap: $1.65 Billion
Price/Earnings: Negative Earnings
Forward P/E: N/A
This could possibly be a decent long-term play, especially if they can start turning the expected revenue growth into positive earnings. For the sake and purpose of this article, it was a good idea to buy right off the bat on opening day and sell on opening day.
|Jul 20, 2011||57.01||60.00||32.50||35.77||5,847,200||35.77|
Highest Possible Return on Opening Day: 5.3%
Here is one that did not pan out, but taking the emotion out and putting in that stop, the loss would have been minimal at around 5%.
52 Week Low: $21.22(62.8% loss from opening day starting price)
52 Week High: $60(on opening day)
Current: $22.13(57.7% loss from opening day starting price)
At least with this, for those that got in for the long-term on opening day and did not buy-in right away, the loss would not have been nearly as bad, but the losses are still poor.
Market Cap: $610 million
Price/Earnings: negative earnings
Forward P/E: 70+
This is another where sales growth and earnings are expected to rise, but again, the initial trading had it extremely overvalued.
|Nov 4, 2011||28.00||31.14||25.90||26.11||49,813,000||26.11|
Highest Possible Return on Opening Day: 11.2%
This one did not do anything too special, but a nice gain around 10% in one day is good, easy money. It shows that it is not smart to go for the homerun on these, but to take a good amount off the table between a 5% - 10% gain.
52 Week Low: $14.85(47% loss from opening day starting price)
52 Week High: $31.14(on opening day)
Current: $22.55(19.5% loss from opening day starting price)
I think the picture pretty clear now that it is probably best not to buy on opening day, if one wanted to invest in a "hyped" IPO for more than a short-term trade.
Market Cap: $14.4 billion
Price/Earnings: negative earnings
Forward P/E: negative earnings expected
Like the others, sales growth is expected to grow significantly, at about 50% each of the next two years. Wow, the market cap was at around $30 billion on the initial trading day. Maybe the most overvalued of the bunch?
Basically, it seems crazy to not wait to buy these overpriced stocks for a longer term hold, but they can serve as a good trading vehicle with good discipline and taking profits off the table. If an investor can get in as soon as it begins trading, sets tight stop, and sell at minimal gains, it can be easy to not risk too much while having the opportunity of gaining a good amount. There are obviously many more IPO's that could be looked into, but to me based on talk and how large each of the offerings were, I think seperates them from the rest as being considered as each, on their opening day had a market cap of at least $2 billion and some, much more. While they are in different sectors, they are all internet type, based companies.
There are many variations that can be had using this strategy such as, selling all at 10% gain or if does not hit that 5% loss. Another, selling in increments, maybe totaling 4, at every 5% gain. Another, selling half between 5% to 10% and hope for a 30% plus ride up on that one day. I could go on and on, but it is shown that getting in right away and selling on the same day can have quality results.
Is Zynga going to be different? It is highly doubtful as it fits into the same category of the others. But Maybe or it at least presents an even better quick, short-term opportunity as they cut their initial price by about half of what they were initially planning on doing. Here is an excellent article that outlines the reasons to stay away for a long-term investment. Well, at the very least, other than for very short-term trading, wait a good amount of time to get in if you really want to for the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: If I do get in ZNGA, as indicated in the article, it would be the day it starts trading, and I will definitely sell the same day