Back in June, shortly before Pandora Media's initial public offering, I wrote a blog post titled "Only excitable rubes buy Internet IPO shares on Day 1".
The headline probably makes it sound like I was being mean, but actually I was both stating a fact and offering well-intentioned advice.
That advice, of course, is to stay away from IPOs on the first day of trading because it's a sucker's play. The underwriters' sole goal -- accomplished with the help of the financial media -- in taking a company public is to maximize profits. So they gin up the hype machine, emotionally manipulate average investors with last-minute offer-price increases to create an artificial sense of demand, and then wait for the frenetic mob to bid up share price on Day 1. Then the underwriters and their insider Wall Street pals who got shares at a discount laugh all the way to the bank.
Call me cynical, but that's how the system works. As proof, let's take a look at three Internet IPOs from this year and see how investors who bought shares on Day 1 have fared so far.
Pandora Media (NYSE: P)
Streaming music company Pandora Media went public at $16 a share on June 15 after two last-minute increases to its offer price. Let's say you were one of the "lucky" investors who scored shares early on IPO day at the top selling price of $26, and let's say you bought 1,000 shares because you're a playa! How much is your $26,000 investment in the money-losing company worth now?
Answer: $14,030 through Wednesday's market close. That's a loss of 46% in a little more than four months. (For no discernible reason, Pandora shares were up 5.7% to 14.83 early Thursday, but I doubt that will excite the $26 a share stockholders.)
LinkedIn (NASDAQ: LNKD)
The social networking site for professionals launched its IPO on May 19, pricing at $45 a share after dramatically raising the offer price from the $32 to $35 range. Better get in fast, suckers!
Some suckers did, buying shares priced as high as 122.70 on the first day. Shares of LinkedIn have never been higher since, and the last time they were over $100 was Aug. 5.
LinkedIn closed on Wednesday at 86.48. For shareholders who bought at the peak price, that's a loss of 29.5%.
Demand Media (NYSE: DEM)
Here's the year's biggest IPO sucker play. I called this even before the content farm went public on Jan. 26.
Demand priced its IPO at $17 a share, which peaked at $25 on the first day. Let's say you bought 1,000 shares at that price. You could have sold at a slight profit on April 6, when shares briefly topped out at 27.38. If you didn't, you've been underwater since.
But I don't mean just underwater: I mean so far down that you can see shipwrecks and lost civilizations. Demand's stock closed Wednesday at 6.21. That's a loss of 75%, and that's what you get when you seek IPO investing advice from eHow.com, Demand's flagship junk content repository.
Keep all of this in mind when the underwriters for Groupon and Zynga try to play you with their last-minute offer-price increases and tales of road-show exuberance. It's all a con.
Again, I'm not saying it's a bad idea to buy shares of a new Internet offering. I'm saying it's a bad idea to buy on the first day, when emotion trumps reason. You'll have plenty of chances from the second day on.