Cerebras IPO is coming. But what does history tell us about IPOs?

In my opinion, a lot of people will fall victim to the pump and dump in the Cerebras IPO.

According to a 2021 study done by Nasdaq,

Here is some key information on IPOs:

Almost all companies are unprofitable when they IPO

Data show that the majority of new companies coming to market are unprofitable when they IPO. Since the 1980s, unprofitable IPOs have risen from around 20% to 80% of the total IPOs each year (Chart 1).

Over the long run, IPO returns deviate significantly

Given all this, it’s interesting to look at what happens to IPO stock prices in the years after a company first IPOs, especially as it gives insight into whether earnings growth expectations on day one are accurate (and the market is efficient) or not.

We analyzed the performance of companies that came to market between 2010 and 2020.

What we find is long-run performance varies significantly, and even more so the longer the timeframe. In Chart 3, we show the distribution of IPO performance up to three years post IPO. The colors show the magnitude of out (or under) performance. For example, the day after the IPO, just over 50% of companies outperformed the market (green colors), with a quarter (26%) of companies beating the market by less than 2.5% and another quarter underperforming by less than 2.5%. That shows that mostly the overnight placement price is close to the valuation struck in the market on day one.

However, a year later, we see that the majority of companies are either outperforming or underperforming the market by more than 10%. We also see that more companies are underperforming than beating the index (the red bars stretch below the 50% line).

That seems to indicate that for some companies, the initial IPO enthusiasm wanes or expected earnings are not met, and investors reprice the IPO to reflect the actual, slower growth of the company.

Chart 3: Most IPO returns turn negative in the long run

"Three years after their IPO, we calculate that almost two-thirds of IPOs are underperforming the market, with most (64%) more than 10% behind the market’s returns."

A few IPO winners outpace those who underperform

Three years after their IPO, we calculate that almost two-thirds of IPOs are underperforming the market, with most (64%) more than 10% behind the market’s returns.

However, while the outperformers only represent around 29% of the total IPOs, they outperform by much more (on average), with some doubling or tripling in price (Chart 4). The data show that the top 10% of IPOs earn an average market-adjust return of over 300%, while stocks in the 9^th and 8^th deciles earn significantly lower market-adjusted returns of 75% and 25%, respectively.