With the surge in Google
Well, at a tech conference (yeah, another sign of a comeback), Goldman Sachs'
His thesis is quite simple: Net companies like Google and Yahoo!
Even if investment bankers price these hot Net IPOs at sensible valuations, they're likely to appear as a great bargain at the very outset. There's always a good amount of speculative activity, particularly in areas such as online advertising, to push valuations into the stratosphere. What do I see here? Greed taking precedence over concerns about old-fashioned fundamentals of valuation. This, for example, appears to be the case with Baidu, which rose 354% on its first day of trading.
Or look at the most recent dot-com: WebMDHealth
But there's something more significant to consider as you evaluate IPO prospects. A full and proper valuation prices a stock based on expectations of future profitability and cash flow. To an extent, that's an investment banker's job, because their task (at least theoretically speaking) is to price it as high as possible.
However, investment bankers have a perennial conflict. They want the company they're offering to get a strong valuation to raise much-needed capital. On the other hand, they often get their own clients (company executives, members of the board, etc.) into the deal -- in which case you're compelled to wonder just who they actually represent, because these same individuals have some financial interest in the shares being sold and might find a reasonably priced offering attractive. It seems to me that there's no obvious and clear-cut answer.
A body of research suggests that investment bankers underprice some offerings to favor executives and buy-side clients, allowing them to profit at the expense of the company itself. Another body of academic research on IPO performance reveals that one- and five-year performance consistently lags that of market indexes.
The bottom line? You, the individual investor, are not the investment bankers' constituent. It appears they're pricing for the benefit of either the listing company or its management. You're not winning because you likely won't be able to get in at the same price as management, and a fully valued stock is not the sort you'd like to find either. Cut your losses, folks.
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Fool contributor Tom Taulli does not own shares mentioned in this article.