Johannesburg, 19 October 2022: The Volkswagen group’s announcement that it would float it’s previously privately owned luxury sportscar brand Porsche on the market on September 5th turned investor attentions firmly toward Initial Public Offerings (IPOs). With the market currently recording record high inflations, with low growth and the Russia/Ukraine conflict dragging on, the announcement brought some welcome relief to those in the financial sector.
The Porsche IPO took place on September 29th becoming Germany’s second-largest listing on record. Since the listing, Porsche shares have gained 5.8%, giving it a market valuation of 79.5 billion euros, which is slightly more than the 74.5 billion valuation for its parent company, Volkswagen.
This comes as no surprise to Fred Razak, Chief Trading Strategist at CMTrading who says IPOs are generally a good time to get into a company.
“The idea is a company is offering you ownership of a share of their company at a time when they are anticipating future growth. They need the capital and want you to participate in the future of their success,” Razak explains. “People therefore invest in IPOs because the expectation is that there will be significant growth in the next twelve to eighteen months”.
Razak cautions investors, however, against believing that IPOs are a slam dunk on the path to short term riches.
“The company sets the price for their shares at the IPO. They are generally based on an estimated value for the company. This can backfire if the price is overestimated, which is what seemed to happen, for example, with Facebook,” says Razak. “At the time, when Facebook floated at, I believe, $35 a share there wasn’t enough uptake and the price slipped to $19 a share. Facebook were so angry about that, because they had worked hard to ensure they weren’t overestimating. Those people who got into the IPO at $35 were therefore initially disappointed and it was a big issue. So short term it seemed like a bad investment. They have since risen dramatically before recently retracting again to $126 a share. $35 therefore doesn’t seem like a bad option at all.”
Razak insists that with Porsche or other IPOs investors need to do their research just as with any other share purchase.
“There are IPOs like Facebook that take years to return profits, but there are others that open up and they are an instant big hit. There is never a sure win in investing or trading. It’s about increasing one’s probability. You are trying to speculate on the future success of the company. Before investing, do your research,” says Razak.
That said, a properly researched IPO can offer the opportunity to get in on the ground floor of a potentially explosive company, which builds hype, making IPOs seem a more attractive investment to investors.
“I remember Go-Pro, no one saw that coming. It was a phenomenal company that took the market by surprise,” says Razak. “It was this guy, a surfer himself, who developed a unique way to film yourself doing sport, he released his product, the company exploded and when it floated in an IPO it exploded even more than that. The hype was unbelievable. In the end though, being invested wasn’t about the hype. It was about seeing what the product had to offer, researching the market, seeing the edge and taking advantage of it, just like any other share investment”.
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