The hot IPOs that burnt their investors

Everyone wants to invest in “the next big thing” at the earliest possible moment and for most investors, that means piling in when a stock becomes publicly available through an initial public offering (IPO). The past year has seen more than 1.3 million IPO-related internet searches in the UK alone.

Yet, for all the hype surrounding blockbuster IPOs in the UK and the US, there’s a high chance you’ll be facing a loss at some stage, based on new research from Finder. In the worst cases, stocks such as Robinhood and Funding Circle lost over 70% of their price a year after the IPO.

We analysed 24 hyped UK and US IPOs from the last 5 years, and our findings suggest that 1 year or less is an IPO death zone: a week after the IPO, 16/24 share prices were lower, a month later 19/24 were lower, and after a year, it was 14/20 (4 were less than a year old). As we published our article, only 8 out of the 20 that were older than a year had climbed above their initial price.

For the 20 IPOs where we have at least 1 year’s worth of data, the declines are rather dramatic. The average IPO share price drop after 1 week was 11.9% (for the 12/20 that were lower after a week) and a year after the IPO, the 14/20 stocks that were down had a catastrophic average share price decline of 43.2%.

So if you want to increase your odds of being a successful IPO investor, our research suggests you’ll need nerves of steel to hold on throughout the probable volatility. Because even the IPOs that eventually go on to be successful in the long run tend to have a bumpy ride initially.

Hyped IPOs that went south: Lyft, Aston Martin, Robinhood and more

To see how the share prices of recent IPOs have performed in the UK and the US over the last 5 years, we picked 2 popular companies from the US and 2 from the UK for each year based on Google Trends data, or if that wasn’t available, we picked the largest IPOs (by money raised).

While Spotify (SPOT) and Uber (UBER) have mostly seen growth since their IPOs (54%+ and 83%+ share price gains at the time of our analysis), these were exceptions out of the 24 companies we checked.

Out of all 24 US and UK IPOs we checked in March 2024, the US IPOs came out on top with 6/12 being positive at today’s share price, compared to an abysmal 2/12 in the UK. The table below shows 20 IPOs more than a year old and summarises the year-on-year IPO share price change along with the current price. You can see the full version of the table with all 24 IPOs and more prices below.

Least to most successful IPOs after 1 year

This table shows how the share prices for some of the hottest IPOs from the UK and the US performed – those with the biggest drops over the first year trading publicly are first.

• Full table here

  These are the 24 IPOs we checked, in chronological order.

  Company	IPO opening share price	Share price 1 week after IPO	Share price 1 month after IPO	Share price change after 1 year (%)	Share price change vs now (%)	Current share price
  Spotify (SPOT)	$166	-9.70%	-0.61%	-13.31%	102.85%	$336.52
  Dropbox (DBX)	$29	7.76%	-0.28%	-25.10%	-19.00%	$23.49
  Aston Martin Lagonda (AML)	£45.22	-15.26%	-19.73%	-74.75%	-96.63%	£1.52
  Funding Circle (FCH)	£4.60	-25.43%	-23.91%	-78.70%	-77.87%	£1.02
  Uber (UBER)	$42	-0.21%	5.17%	-21.93%	57.48%	$66.14
  Lyft (LYFT)	$87	-14.66%	-34.39%	-68.36%	-85.81%	$12.38
  Trainline (TRN)	£4.00	3.00%	2.25%	27.75%	-19.70%	£3.21
  Airtel Africa (AAF)	£0.77	-5.19%	-10.39%	-20.78%	35.42%	£1.04
  Snowflake (SNOW)	$245	-11.27%	-0.74%	32.05%	-48.73%	$125.62
  Airbnb (ABNB)	$146	0.72%	3.61%	23.58%	-1.21%	$144.23
  THG Holdings (THG)	£6	2.17%	-0.83%	-0.67%	-89.48%	£0.63
  FRP Advisory Group (FRP)	£0.8	-7.32%	-3.66%	30.49%	58.54%	£1.30
  Coinbase (COIN)	$381	-18.13%	-25.56%	-61.34%	-35.68%	$245.06
  Robinhood (HOOD)	$38	34.13%	23.32%	-76.18%	-43.66%	$21.41
  Deliveroo (ROO)	£3.31	-13.60%	-22.66%	-65.86%	-60.51%	£1.31
  Darktrace (DARK)	£3.49	-3.44%	-1.43%	24.36%	68.25%	£5.87
  Corebridge Financial (CRBG)	$21	1.71%	-0.88%	-8.49%	41.46%	$29.00
  TPG (TPG)	$33	2.45%	-4.55%	3.94%	43.97%	$47.51
  Clean Power Hydrogen (CPH2)	£0.54	16.67%	29.63%	-53.70%	-81.48%	£0.10
  Ithaca Energy (ITH)	£2.45	-18.37%	-29.39%	-35.92%	-49.80%	£1.23
  Arm (ARM)	$56	-7.02%	-7.58%	N/A	181.07%	$157.68
  Instacart (CART)	$42	-28.83%	-41.62%	N/A	-19.12%	$33.97
  CAB Payments (CABP)	£3.35	-10.45%	-13.73%	N/A	-75.93%	£0.81
  Admiral Acquisition (ADMR)	$10.00	-5.20%	-3.30%	N/A	-1.50%	£9.85
  Reddit (RDDT)	$47.00	4.30%	-10.60%	N/A	33.94%	62.95

Do major IPOs outperform the market?

One way to assess if an IPO was a good pick is by comparing its share price performance with broader stock market benchmarks like the S&P 500 in the US or the FTSE 100 in the UK.

After all, if you’re going to the trouble of investing in a stock shortly after the IPO, you want the juice to be worth the squeeze. Otherwise you could have saved yourself some unpredictable turbulence and invested in a major index fund instead.

Unfortunately, the successful IPOs in our research rarely beat the benchmark index. The best UK IPOs have performed better than the FTSE 100, but this wasn’t the case in the US. However, a big reason for this is the underperformance of the FTSE 100 index in the last 5 years, with sluggish results, unlike the massive growth of the S&P 500 in the same period.

Below is how some of the best and worst IPOs have traded since 2018 compared with the S&P 500 and FTSE 100.

For the data displayed above, we selected the 2 best- and worst-performing IPOs from the UK and US over the last 5 years (based on the current share price).

And if you want to see what a £1,000 investment would look like in a hot IPO compared to a benchmark index over time, take a look at how an investment in Spotify would have performed against the backdrop of the S&P 500 index, below.

Are IPOs overpriced?

The way IPOs are priced isn’t an exact science, but there are a few typical elements.

Firstly, when a private company decides it wants to go public, it will enlist the help of investment bankers. The company will usually work with one, or multiple, investment banks to get the ball rolling on the IPO process. This involvement is known as underwriting.

Each underwriting process will vary, but the investment banks will analyse the company and the current state of the stock market. When trying to price a firm for its IPO, investment banks will look at tangible evidence like the company’s financial statements, but they’ll also look at more subjective elements such as where the business fits into the market landscape and its prospects.

Since some companies going public may have delusions of grandeur the underwriters will attempt to examine all the information available and work together to set realistic expectations. And they may test out demand from institutional investors with roadshows.

Knowing roughly how many shares will be sold, and at what price, means that the company and the investment bankers can gauge how much money will be raised. Unfortunately, the rest of us – the retail investors – have to wait until a further round of price discovery takes place. For this, the stock exchange where the company is being listed will look at all the buy and sell orders and try to figure out an opening price that will satisfy all the initial orders.

A key factor in IPO prices

Although there are plenty of subjective factors involved when deciding the share price for an IPO, one of the key objective measures used is a “discount cash flow” (DCF) model.

This involves financial modelling that attempts to determine a sound valuation for a company before its IPO, based on future cash flows (future returns).

Higher interest rates and inflation can have a negative impact on the valuation. This is because, with inflation, a pound earned today is worth less tomorrow. And with interest rates, a safer return can usually be found elsewhere so this needs to be taken into account.

The impact of inflation and higher interest rates is largely why we’ve seen pre-IPO valuations completely plummet in the last few years, and why plenty of firms have decided to hold off on going public until inflation cools and rates stabilise (or fall).

5 tips for assessing an IPO to invest in

George Sweeney

Deputy editor

1. Don't feel pressured to jump in. Even the hyped IPOs that went on to be successful didn't rise in a straight line. It's likely that you'll have an opportunity to invest at a cheaper level than the initial IPO share price if you don't mind waiting.
2. Consider less obvious stocks. Some of the IPOs that have performed best in terms of share price are the companies that fly under the radar, rather than the ones in the headlines.
3. Prepare for volatility. Don't invest at the opening bell of an IPO if you don't have the stomach for volatility. Most stocks will bounce all over the place as the market attempts to properly price them, and it takes patience to hold on during these bumpy periods.
4. Consider the US. While many investors are naturally keen to back British, the truth is that our IPO market is generally a damp squib. For example, of the hyped IPOs we analysed from the past 5 years, the US listings had a better chance of success and fewer of them saw catastrophic losses.
5. Research as much as possible. When a company goes public, there's limited information and this is why these IPOs can be difficult to price. If you can't find the details you'd normally look at before buying a stock, consider waiting until more research becomes available rather than jumping in based on buzz.

Bottom line

Some of the most hyped IPOs have plummeted at some point within their first later. So bear in mind that buzz around a stock’s public listing doesn’t necessarily translate into positive share price movement.

Our research suggests that IPO share prices built on hype tend to be quite heavily inflated. And following the IPO is often a period of share price deflation as all that price pressure gets released like hot steam. For many IPOs, it’s only after the 1 year mark where we start to see if a company could go on to be successful. Investors likely want to see how a business performs after its first full year as a publicly listed company.

It’s worth take extra care when thinking about whether or not to invest in an IPO with plenty of excitement, because our analysis suggests there could be better opportunities to invest at a lower share price if you can wait.

Methodology

Google trends data used to find the most searched for IPOs in the UK or US during each year. For the few instances where that information wasn’t available, IPOs raising the most amount of money were used.

• Initial share price – opening price on day of IPO
• 1 week after IPO – closing price on same day in the following week
• 1 month after IPO – closing price 4 calendar weeks later
• 1 year after IPO – closing price on same day in the following year

(if the following date was a bank holiday or weekend where markets closed, the closing price just before was used)

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.