Initial public offerings typically experience a nice pop when they are launched, much like what we saw with Wednesday’s Warner Music IPO, but what investors should look at are long-term prospects.
You see, IPOs generally start off with a bang.
There’s a lot of buzz around companies as management travels to various potential investors, pitching why their company’s shares should be bought.
It’s meant to hype up excitement as a company moves to the public market to raise capital.
But for the most part, that’s all it is. Hype.
You have to consider how a company will perform in the long run before you make a decision to invest.
Look at Past IPO Examples
Take Casper Sleep Inc. (NYSE: CSPR) for example.
When the mattress manufacturer debuted on the New York Stock Exchange in February 2020, it opened as high as $15 per share.
But that didn’t last long.
The company tanked, along with the broader market, to a low of under $4 per share. It has started to climb recently, signaling it may now be a potential buy.
If you had invested when the company launched, you would have lost a lot of money on that investment. It will take some time before you can reach a break-even point.
So, it’s not always best to sink money into an IPO in the first three days of its offering.
Also, the taste for IPOs has soured a bit. With 38 IPOs filed this year, we are on pace for the lowest number of total initial offerings coming to the market in a decade.
Warner Music IPO Will Have the Same Story
On Wednesday, Warner Music Corp. (Nasdaq: WMG) opened its IPO with an offering of 77 million shares priced at $25 per share.
That values the company at $12.75 billion. Its IPO raised $1.9 billion.
The buzz around the IPO is due to the fact that Warner Music is the third-largest recording label in the world, according to Reuters.
Its recorded music streaming revenue in April jumped 12%, as Warner is the home to many of today’s popular recording artists.
Since its open, shares of Warner Music have popped more than 28% to trade above $31 per share. And, its momentum suggests that price will continue to climb.
Sounds tempting as an investor, right?
Wrong — and here’s why you shouldn’t let FOMO, or fear of missing out, cloud your judgment.
Pump the Brakes on Buying Into Warner Music’s IPO
It may look very tempting to jump into Warner Music.
The company has a good track record and its first two days have been strong.
But recent history will tell you the price pop Warner is seeing likely won’t last.
And I’m very hesitant to get into an IPO in the first few days. The numbers are too good to be true and you have to remember, there is a lot of hype surrounding that stock price.
Warner Music is a solid company with a decent financials, but decent isn’t enough to take the risk now.
Essentially, it’s not the best time to jump with both feet into Warner Music’s IPO.
Wait for this stock to find its bottom. Also, perhaps even more important, is you should wait for the lockup period to end to see how many initial investors sell off their holdings.
That will be the optimum opportunity to buy shares.
