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Zacks Investment Ideas feature highlights: Airbnb, Uber Technologies, Robinhood, Meta Platforms and Reddit

For Immediate Release

Chicago, IL – June 17, 2024 – Today, Zacks Investment Ideas feature highlights Airbnb ABNB, Uber Technologies UBER, Robinhood HOOD, Meta Platforms META and Reddit RDDT.

How to Trade IPOs: Private vs. Public Investing

Investing in private and public markets are entirely different endeavors, though they share some similarities: innovation, earnings growth and sound management are integral drivers that determine investment performance of both.

Understanding Private Markets vs. Public Markets

Below are five main distinctions between private and public markets that investors must understand, including:

Risk Appetite

Whether you're investing in private or public companies, each endeavor is risky. However, assuming all else is equal, private firms are far riskier than public firms. Private firms are often earlier in their growth curve (or are just an idea) and do not have to meet the same stringent requirements of a public stock exchange. That said, if successful, the reward for investing in a private firm is far greater because investors on the ground floor can enjoy the company's full growth and potentially take advantage of an IPO.

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A private investor or VC (venture capitalist) should be considered a home run hitter. While private investors will "strike out" more, they can be successful by hitting home runs and gaining a piece of the next Airbnb or Uber Technologies before everyone else.

Liquidity and Holding Period

Because public companies are traded each weekday on a major stock exchange like the S&P 500 Index, they offer far more liquidity. Whether this is an advantage or a disadvantage depends on the eye of the investor. For example, a private investor may be forced to hold for years before they can even think about selling.

In other words, if the investment is good, they will be forced to hold and can potentially catch the next multi-bagger (however, this works in both directions). Conversely, a public investor can quickly and easily exit a position they do not feel comfortable in.

Access

Public markets have an overwhelming advantage in terms of access. A public investor only needs to fund an account at a discount broker such as Robinhood to take advantage of fresh IPOs. Conversely, private investors must become "accredited" to invest in less-regulated securities like private firms. Accredited investors must have a certain income. Furthermore, most private companies require a minimum investment, while public investors can invest any amount they wish.

Avoid Common IPO Pitfalls

Like most investments, the individual investor's personal situation and investing framework will play an important role in which direction to take. Success can be found in both public and private investing but since most investors only have access to public markets, we will break down some common IPO pitfalls to avoid.

1. Insider Selling and Lockup Expiry

Wait for Price Discovery

Buying an IPO on day one is a bad decision for most investors for two reasons: First, it generally takes time for the market to find equilibrium or price discovery. Second, insiders and early investors can use the liquidity event to sell shares. The Meta Platforms (formerly Facebook) IPO was a perfect example. Facebook went public in May 2012. However, shares did not eclipse the IPO high until late 2013.

Solution: Wait for the lockup expiry (the period insiders must wait before selling shares) to pass, and let the price settle and form a base structure.

2. Slower Growth

In a 2016 interview, Mark Cuban explained the problem with IPOs: "Companies are waiting seven, nine, ten years or longer to go public and by then their hyper-growth is typically gone." In other words, instead of going public while the company is still growing rapidly, firms wait until growth is slow, and worse, use the IPO as a liquidity event to sell into.

Solution: Look for stocks with a strong Zacks Rank or robust EPS estimates. Zacks Consensus Estimates aggregate earnings estimates from several prominent banks to derive a consensus estimate. Ideally, an IPO should have double-digit or triple-digit EPS growth.

3. Lack of Fundamental Catalysts

Bullish catalysts are necessary for a stock to grow because competition is fierce on Wall Street.

Solution: Find a company with a unique and new bullish catalyst. For example, social media firm Reddit, which just went public, benefits from the AI revolution because its platform is optimal for training large language models (LLM) such as ChatGPT.

Bottom Line

Public and private investing each have pros and cons. To be successful in public investing, investors should avoid three common pitfalls.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.

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Uber Technologies, Inc. (UBER) : Free Stock Analysis Report

Airbnb, Inc. (ABNB) : Free Stock Analysis Report

Meta Platforms, Inc. (META) : Free Stock Analysis Report

Robinhood Markets, Inc. (HOOD) : Free Stock Analysis Report

Reddit Inc. (RDDT) : Free Stock Analysis Report

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