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Should Investors Adjust Their Expectations for the Hottest High-Growth IPOs?

By Jason Hall and Danny Vena - Feb 5, 2021 at 6:05AM

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Huge surges in pre-IPO prices have investors feeling left out in the cold.

2020 was an interesting year for IPOs, with a number of highly anticipated new stocks rocketing up sharply from their pre-IPO prices. Some of the best-known stocks that doubled, or came close to it, on their first day of trading include Snowflake, DoorDash, and Airbnb.  

So what's an investor looking to invest in the next big thing to do? In short, it might be time to adjust your expectations, or maybe just practice a little more patience. In this Motley Fool Live video recorded on Dec. 14, "The Wrap" host Jason Hall and Motley Fool contributor Danny Vena gave investors a little more perspective on the IPO environment. 

Jason Hall: Do you think these really high IPO prices are due to the larger number of 'new 2020 investors' and their fear of missing out? I think it's fear and greed. It's the thing that drives every investor. I think there's no yield. And I think there's a little bit of a spectator sport aspect of it. Two, it's become a participant sports. Your thoughts on that, Danny?

Danny Vena: I think that is a large contributor to the fact that the shares are going up so high. One of the other things that I think it may be feeding into it is, I think as investors, we're starting to get away from the fear of high valuations because we have so many companies out there that are using the high-growth model that we see so often times with, say, for instance, cloud-based or software-as-a-service companies. Where they have really high revenue growth, but they're not making any profits yet.

As a result of that, when we see these types of high growth, often times investors will give companies a pass on their bottom line. I think what we're seeing now is investors are starting to get used to that high growth and I would caution folks to, kinda back away from that a little bit. 2020 is a very different year than any year since I become an investor. I think that those ridiculous growth rates are going to slow a little bit and people shouldn't be looking for that to happen all the time.

Jason Hall: Yeah, "AFR" that's my new metric for 2020, it is the "adjusted for reality" metric. If you expect to see 20%, 30%, 40%, 50%-plus revenue growth and that becomes your expectation be prepared for disappointment in the future because we've seen more companies with hypergrowth over the past couple of years than we will normally see. These markets are going to become more mature, they're going to become more competitive. You have to consider that.

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