As major companies including OpenAI, Anthropic, Databricks, and Anduril approach initial public offerings (IPOs), investor interest in newly listed firms is rising, particularly in the technology and artificial intelligence sectors. Despite the heightened attention on these high-profile listings, historical data and market analysis suggest caution for investors considering buying shares during IPOs.
Recent IPO activity in the UK and Canada has drawn some attention, with firms such as Shawbrook Group and Princes Group listing in the UK, and Apotex Health Corp. leading Canadian offerings. However, compared with the massive US IPOs like SpaceX’s record-breaking $86 billion launch in June, these regional markets represent relatively modest activity. The broader enthusiasm, driven largely by the US tech and AI industry, reflects strong sentiment toward these innovative sectors, encouraging founders and early investors to capitalize on public listings at favorable valuations.
Yet, experts highlight that most IPOs tend to underperform after their initial debut. Analysis of US stock data since 1990 shows that more than half of newly listed companies lagged the S&P 500 index within their first month of trading, with the underperformance widening over time. At the one-year mark, nearly 70% of these IPOs performed worse than the benchmark by a median of around 20 percentage points, increasing to a 35-point lag at two years.
Even IPOs that rally quickly often fail to maintain those gains. For example, SpaceX shares jumped nearly 50% above their offering price in their first three trading days but then fell 23% in the following days, sitting just 10% above the IPO price as of early July. Similarly, other IPOs linked to AI and tech hype, such as Norway’s Magnora Data Center ASA, initially saw strong demand and price gains followed by significant declines. In other cases, like the Princes Group and Shawbrook in the UK, early rises were eroded by subsequent downturns, illustrating that initial success does not guarantee sustained performance.
The dynamics between founders, early investors, and public buyers also shape IPO outcomes. Founders seek to maximize returns or access capital cheaply, while IPO investors aim to purchase undervalued shares. This divergence, combined with promotional efforts by investment banks during marketing roadshows, often inflates valuations beyond intrinsic worth.
Moreover, IPO shares are frequently allocated heavily to institutional investors before public trading begins. These pre-IPO holders often face lock-up periods restricting immediate sale but may be motivated to sell once allowed, adding volatility. Retail investors typically gain limited access to shares amid heavy demand, and acquiring a significant position in a hot IPO can be challenging and risky due to concentration in a single stock.
Historically, very few renowned investors have made IPO purchases a cornerstone of their investment strategy. Past high-profile IPOs with strong brand recognition, such as Facebook in 2012 and Uber in 2019, experienced disappointing market debuts and volatile post-IPO performance, underscoring that name recognition alone does not ensure success.
Experts caution that exuberance around IPO activity, particularly in sectors like AI and technology, may signal overenthusiasm in markets, potentially preceding broader corrections. They advise investors to remain vigilant, emphasizing diligence, patience, and a long-term perspective rather than chasing immediate gains driven by hype and emotion. Buying into IPOs without careful evaluation often results in paying premium prices with a higher risk of underperformance.