The official holiday season might still be several weeks off. But many stock market traders might feel like Christmas has come early for Wall Street.
I’m not just talking about major U.S. indexes hitting all-time highs these last few months. The sheer number of new companies to choose from is just as exciting.
So far this year, there have been 161 initial public offerings (“IPOs”) on U.S. stock exchanges. That’s up from 106 in 2024, according to Renaissance Capital.
Among those 161 was CoreWeave, an artificial-intelligence cloud-computing firm that made its stock market debut on March 28. Since then, it has shot up 245%. And Circle Internet, a stablecoin issuer listed on June 5, is now up 328%.
Two weeks ago, I also mentioned Fermi (FRMI), a data-center operator to be. Despite having no operating assets yet, and therefore no actual profits, it debuted to wild investor excitement.
Shares listed at $21, rising to over $32.04 on that first day of trading. IPO investors could have pocketed returns of around 52% if they sold out quickly.
The price has retreated somewhat since. But Fermi still looks pretty popular. With a share price around $30, it carries a market cap of about $17 billion. That’s generous considering how it’s still in such an early stage of development. But apparently, Mr. Market has valued its land and blueprints for that much.
And, again, 2025 isn’t over yet.
If anything, IPO activity is likely to pick up from here. The markets are set to see the most fourth-quarter activity since 2021, with about 50 companies lined up to go public.
Moving on to 2026, Renaissance Capital predicts that another 250 companies will go public, raising more than $50 billion. If true, that will be a 50% increase over 2025.
It’s easy to get excited. However, before you go all in, let me give you a few words of caution.
There’s a reason Warren Buffett never invests in IPOs. And neither do I.
The Reality of Investing in IPOs
It used to be that IPO investing was largely reserved for the wealthy and well-connected. And, to some degree, it was better that way.
The wealthy and well-connected have more money, so it doesn’t hurt as much when they lose some.
But times, they do change. As a recent Wall Street Journal article explains, “brokerages like Robinhood, Webull, Fidelity Investments, and E*Trade have made it easier for retail investors to get in on the action.”
Now, eligibility requirements do vary between brokers. So, I’m not saying it’s as easy as buying “regular” stocks. Fidelity, for instance, allows premium or private-client customers to participate in an IPO only if they have $100,000 or $500,000 in any account, depending on the offering.
Even so, the playing field is much more leveled these days. And that kind of freedom is best navigated by the informed.
Some, such as Warren Buffett, would say that the truly informed stay away from IPOs altogether. Back in 2019, after saying he couldn’t think of a single one Berkshire Hathaway (BRK-A)(BRK-B) had bought into, he explained how:
The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, [and] the animal spirits are rising, that that’s going to be better than 1,000 other things I could buy where there is no similar enthusiasm… just doesn’t make any sense.
The “selling incentives” Buffett is referring to usually come from the insiders with the company who have held illiquid shares in a private company for years or even a decade-plus. And while lock-up periods are common, the days, weeks, and months following an IPO are usually their first opportunity to realize a return… and that’s exactly what many of them do.
For another thing, IPOs today just aren’t what they used to be…
A few decades ago, a company had to go public to raise funds and continue its growth story. The result is that many of these companies were still young, with plenty of upside potential ahead. Amazon (AMZN) famously went public in 1997 with a market capitalization just over $500 million.
That’s not the case today.
The flood of venture and private capital in recent years means companies have no problem raising funds without an IPO. And so, they don’t have one.
They get all the capital they need without the headaches of being a public company. Just look at OpenAI, the creator of ChatGPT, which is valued somewhere between $300 billion and $500 billion as a private firm.
Even the IPOs I listed above – CoreWeave and Circle – carry a market capitalization of $69 and $34 billion, respectively. They might still be good businesses, but the lion’s share of growth has come and gone… and it went almost exclusively to the private investors.
In the absolute worst case, the IPO market can be a dumping ground once private investors feel there’s no more “juice” left to squeeze. And so, they foist the shares onto the public markets to make their exits. A company like WeWork, which tried and failed to go public with a $47 billion valuation in 2019, comes to mind for that.
The bottom line is that market debuts involve more hype than rational interpretation of the facts. When a company wants to go public, it hires investment bankers who essentially act as marketing teams. Their job is literally to create the most ideal environment for the company – the seller – to operate in.
Plus, associated brokerage fees can be higher. Therefore, even if an IPO ends positively, you might not make the profits you expect.
If Your Heart Is Really Set on an IPO…
So how do you maximize your chances of making the most of an IPO?
Most importantly, ditch the hype. Completely set aside all those glowing projections and look at the numbers yourself.
Make sure you understand what the business is and how it operates. Has it made a profit yet? If not, is it on a clear path to profitability, showing signs of improvement year over year? And if so, can it sustain and grow those financial results?
And, perhaps most importantly, does its IPO valuation make sense given those figures?
In short, treat it like any other stock you know you need to research – just with the caveat that this one has less data to work with and therefore requires even more caution.
Similarly, examine members of the management team from the CEO all the way down the line. Just because they look like they know what they’re doing in their corporate page pictures doesn’t mean a thing.
Dig into who they are and what they’ve accomplished in the past. The company may be new, but that doesn’t mean its leaders have to be.
I don’t mean to pick on rising stars here. After all, everyone needs to start out somewhere. But new leaders can be more easily swayed by hype themselves, buying into their own importance and making poor choices as a result.
One of the most extreme examples of young management gone wild is Adam Neumann, the brilliant founder of the previously mentioned WeWork. The success of his startup and all the pre-IPO excitement that built up around it was too much for him to handle.
He ended up promoting – and even demanding – a Wolf of Wall Street business environment, where employees had to drink hard liquor during meetings and deal with hostile outbursts whenever Neumann was feeling critical.
And as mentioned, the result is that WeWork attempted to go public at a $47 billion valuation… despite the fact it had recorded a net loss of $1.6 billion for the prior full year.
Keep all this in mind the next time you’re tempted to invest in a “hot” IPO.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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