Rivian IPO: Why Investors Should Wait

Rivan (RIVN 3.51%) stock has dominated news headlines recently with its splashy IPO. But there are some good reasons for investors to resist jumping into a newly public company's shares. 

In this video clip from "The 5," recorded on Nov. 9 -- before the stock started trading -- Fool.com contributors Trevor Jennewine, Zane Fracek, and Demitri Kalogeropoulos discuss why IPOs are often overpriced, and why it might make sense to watch a company's first few public earnings reports before establishing a position in the stock. 

Trevor Jennewine: The Rivian IPO is expected sometime this week. The electric truck maker is looking to raise about $10 billion, going to be selling 135 million shares. They recently up the IPO price to $72-74 per share. On a fully diluted basis, that would valued the company at about $65 billion. For reference, when Tesla went public back in 2010, the company came public at evaluation of less than two billion, and over the last decade, only two companies have raised more money through their IPO than Rivian is aiming to do.

That would be Alibaba and Facebook. There's plenty of reasons that investors are excited about this company. Amazon owns 20% of Rivian, and the Retail Giant already has ordered over 100,000 electric vans which it plans to have on the road to support last-mile delivery by 2030. I believe Forward also owns a 12 percent stake in Rivian. I have another two-part question. The first is just how do you approach IPOs.

Do you typically wait or do you feel comfortable jumping right in? Does it depend? Zane, let's start with you.

Zane Fracek: I typically wait. I think guy learned that from The Fool. Honestly, I think it's generally Foolish investing practice to wait a little bit, but that said, I was really interested in Airbnb recommendation recently by David. That goes against the green, but if you're really confident, can be a way to make outsized returns in the market. But I also have really focused on leadership within IPO.

Because for the management team, this is their out if they want to take it in the IPO. I wanted to see who sticks around through the complexity of the IPO process who continues to hold most of their stake. This is mostly because I don't even have my own investment thesis set in stone on the company. If it's so new, it takes me a long time to get through all the information and have concrete thought. So in summary, I wait.

Demitri Kalogeropoulos: I'm with Zane on this too. I like that point about management. It's a good opportunity to see how management is going to react. That's a big change in the company.

But as rule I tend to avoid IPOs, because mainly the odds are stacked against us as investors in this situation right more so than in others. Mainly because the prices are almost always higher than we would normally pay because the company gets to decide when they do their IPO and you don't hear about IPOs during down markets or like bear markets.

They only happen when we're in year into a big bullish market and that makes sense. These companies want to raise as much money as they can, but that also means like got to be a little bit more careful because it's easier for me to pay too much in that situation. Then the other thing is there's always so much interest in hype and press in the IPO. Everyone likes to watch the stock price jump on that first day and that kind of environment is also a dangerous time I think, to try to invest in because there's just crazy volatility and you could just easily lose a lot quickly.

The third thing is just that there's not usually a big track record that I can look at, I'm a big dividend fan and I like dividend aristocrats, those are stocks that have at least 25 years of consistent dividend growth and you can review how a company is down over a long. It's about any selling environment you can imagine. But in an IPO, you're lucky to get a couple of years of good data to look at so those are just ways you're a little bit more handicapped than normal as an investor and for that reason, I like to wait a few quarters if I can. It's not that I'm not interested.

I'll follow an IPO. There's a lot of really exciting companies that come out. Rivian is a great example too. With Facebook, I followed this strategy back when it went public in 2012, I just watched and then over the next year in 2013, I made some investments and I've held the stocks since then and it's up 700 percent in that time so it worked out to worked out fine.

Jennewine: Yeah, I am going to side with both of you guys. I tend to wait on the IPO and SPAC Show the other day. Danny Vena mentioned that companies get to choose when they go public and that doesn't mean everything is not above board in the SEC filings, it's just that they get to pick the opportune moment.

Maybe they can cut spending on something here there and make certain numbers look a little bit better than they might be if they we're pursuing growth and so I'd like typically to have more data, at least a few quarters, three quarters or so to look back as a public company just to get a better feel for what the potential is.

That being said, every once in a while, I can't remember one recently, but every once in a while I think I will jump in earlier than that if I'm particularly excited about a company just a very small position.