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Is it worth investing in an IPO?

Reading time: 2 minutes

For companies, it seems like a good time to go public
to dare. The environment this year has been favorable, at least so far. This is evidenced by the overall rise in prices of most established companies and important stock market indices, despite some declines. Prominent examples who have ventured onto the floor during these weeks include: Alibaba from China and Zalando.

Other companies are planning to go public in 2014, such as Rokett Internet, Scout24-Group or Hella.

The question potential shareholders should ask themselves is, should I try to go public and get at least a few shares? A general or unambiguous answer cannot be given. It depends on the individual case, the quality of the company, the investor's willingness to take risks and also on his private situation.

IPOs present some problems for investors

The problem that arises for investors is that there is often no, only incomplete or only recent data on newcomers to the stock market. And at Alibaba and Zalando in particular, investors hardly have any means of obtaining reliable information.

Alibaba is a company merger that is hard to see through to third parties. Information, e.g. balance sheets or key figures, can hardly be obtained. There are also political risks in China. It is known from Zalando that the company has so far barely been able to generate a profit. Zalando's business model is exposed to high risks because the company has to deal with high returns (common in the industry). Insiders say that between 50 and 80% of the goods are returned.

This is unlikely to make any money in the long run. At Rocket Internet, industry experts assume that there is a risk that the company will only earn money in many years. It is the same with many companies that come from the Internet or high-tech industry.

Sure, in the short term, price increases - and thus also high profits - are possible with all IPOs. However, the risks that things will go downhill again after an initial phase of euphoria are large to very large for many companies. Often times, prices then remain below the issue price for months or even years. And it must be doubted whether the companies will ever earn so much money that, for example, they will grow in the long term and also pay dividends.

If you want to invest in an IPO

Anyone who nevertheless wants to "get involved" in IPOs should try to find out as much as possible about the company: Is the business model understandable? Are there any risks? What are they and how can they affect in the worst case? Has the company made a profit so far? And that at least over a period of 5 or more years? How are important key figures, e.g. price / earnings ratio, return on sales, equity ratio?

Those who do not want to take the risks and still want to invest in stocks should rely on the tried and tested. In other words, companies that have been on the stock exchange for a long time and that have proven that they generate profits, pay dividends and are also good for continuous price increases.

Many companies from the IT and high-tech sectors also meet these criteria. However, due to the short innovation cycles, strong competition and short lifespan of products, one must always expect setbacks and greater fluctuations than companies that earn their money in relatively safe fields, e.g. B. in the food or consumer industry.

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