Does a growing number of IPOs indicate overstretched markets?

Whether or not you believe that a growing number of IPOs indicates overstretch markets, the fact is that you can only really float an IPO when there is investor demand. Investor demand predominantly comes when markets are strong and investors are looking for new offerings. So, the reality is that a growing number of IPOs in the US is probably indicating markets are stretched in the short term although the medium to long term situation is a little more difficult to predict.

Selling into strength

If you trade stock markets you will find it is easier to sell stock, especially large amounts of stock, when the price is moving up and there is demand. In effect this is “selling into strength” which is the best market condition to sell an IPO. For example, if there was demand for technology shares and you could see the sector pushing to record levels what better time to float? If on the other hand you were looking to float a technology company and there was no demand for technology shares then an IPO would be a waste of time?

Does a growing number of IPOs indicate overstretched markets?
Was the SnapChat IPO timed to perfection?

Will markets top out?

We are getting towards a situation in the US where Donald Trump needs to deliver on his policies and walk the walk rather than talk the talk. This may sound simple but markets have responded to Donald Trump’s tenure as president with renewed anticipation and hope for the future. He has flattered to deceive on numerous occasions but he has also given hope to investors looking for a stronger economy, less red tape for businesses and a buoyant real estate market. If he is able to push ahead with his economic targets, economic growth of 4% per annum, sort out the employment market, address immigration in a more pragmatic manner then there is no reason why US stock markets should not push further ahead.

On the flipside, if markets give Donald Trump another six months to deliver and he fails to do so then the anticipated growth over the next couple of years would have been in vain. This would likely lead to a fall in US stock markets, a lack of confidence in Donald Trump and a very difficult period for both investors and the US government.

Non-profitable IPOs sell best

Who would have thought that non-profit-making IPO Snapchat would be worth a staggering US$20 billion on the stock market? This is a company with “massive potential for the future” which operates in a very competitive market and is reliant on converting users into income streams as soon as possible. We have seen many social media companies struggle to convert users into income streams, which was reflected in the SnapChat share price performance – racing ahead from an initial market price of just over $17 to around $30. This is a perfect example of selling into a strong market for technology shares as investors look for the “next big thing”.

Conclusion

Suggestions that companies looking to float on the stock market are “taking advantage” of current market conditions are bizarre to say the least. The only time to float a company on the stock market is when there is general demand and demand for a particular type of company. Why would you sell a company which you value highly at a time when investors have no interest and you would be forced to reduce the IPO price to ridiculous levels? The number of IPOs is a perfect reflection of investor sentiment in general and toward specific sectors. Rather than seeing IPOs as taking advantage of market conditions they should be seen as reflective of a positive mood amongst investors. How long this positive mood will last is debatable but this is what makes stock markets so intriguing for investors!

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