The Investing Diaries - Jan 14, 2021

As I sit in the morning and have my coffee watching some market updates, one thing that immediately comes to mind is the current state of IPOs in the market. The latest IPO of Affirm (AFRM) has raised eyebrows on its doubling the price of the stock on day one of being public. This of course is always a potential cautionary tale when buying into an IPO on day one and something that I think everyone can learn from because you almost always have time to get in later after a company goes public. That being said just because of stock doubles on the IPO day doesn't mean that's necessarily overpriced, it all depends on the valuation. The valuation is always the key to pricing even when looking at these new companies. The hype typically is what gets in the way.

Now I have been talking a lot to friends over the past year about different companies of IPO many of them asking me “Do you think I should buy into this IPO?” Usually my direct answer is that I myself don't buy into IPOs but if they feel comfortable with evaluation and the price go for it!

I myself rarely will buy into any IPOs unless I see a substantial difference in market cap and the potential to increase that market cap substantially over the next two to four years. This is why I did invest in some things such as Virgin Galactic (SPCE) and Nano-X Imaging (NNOX). With both of these companies, while very speculative nature, I did feel comfortable in placing a small percent of my portfolio in due to the extreme difference in valuation between the price that I purchased them at and the potential market cap that they could create if the technology that is behind their company comes to fruition. Obviously as you can see I say speculative because I do know with any company where you're waiting on significant product development things could go south very quickly. There must be a massive risk reward for me to be able to get into these. This could be something very different if a seasoned company is going into an IPO, such as Petco (which plans to go public soon). Obviously though, a company like Petco would have much less growth potential than a small company like the ones that I've noted.

Now going back to Affirm, I by no means am bashing this company and actually see it having great potential. I myself have used Affirm, in a 0% loan partnership when buying my Peloton (PTON), which of course is probably the most millennial statement that I have ever made.

Affirm It was very simple to use, came out monthly with zero hitches, and was really just a pleasure of a small loan that was so simple I would definitely use it again in the same situation. I do think that it has massive implications for small loans and the ability to do it quickly and easily and understand terms much faster than you would when trying to get alone at a normal bank. All of that though, does not lead me to want to jump in at a 25 billion dollar valuation, which is where currently stands. Now if I could have gotten in at that original $50 price, where the valuation was sitting at 12 billion, I do believe that I would have bought hand over fist because that valuation was fairly low for the potential implications of the company. These are all the type of things that I look at when IPOs are originally released into the public markets for the small people, like myself, to purchase. How much meat is on the bone not only speaks to the potential profit but also speaks to the amount of time before shareholders get impatient and begin to dump the company as they continue to work through growing pains of being a startup.

Again I'm not saying don't ever buy into an IPO, what I am saying is just stay away from the hype and actually take a look at the valuations, where you think the growth is going to be, and also where you think this company will end up in 5 to 10 years. Know that most of these are going to be speculations at first with more clear visions being presented every quarter. I'm sure I'm not telling you guys anything that you don't know, but these were just my thoughts as I watched some of these IPOs roll out and the price is skyrocket on day one to double the market cap of the original offering.

Until next time, happy investing.