A direct listing doesn't raise new capital the way an IPO does; no new shares are offered. It's also riskier in some ways than an IPO since there isn't an underwriter to help drum up demand for the stock. Direct listings tend to work best for well-known companies with an interested investor base and a clear value proposition.
Dutch auctions are also an option for companies seeking to go public without an IPO, although they are less common. Alphabet (GOOG -2.21%) (GOOGL -2.34%) is perhaps the best-known company to go public through a Dutch auction, using the technique in 2004. In a Dutch auction, potential buyers list the price they're willing to pay, and, when the company believes the price is high enough, it sells new shares at that price. Unlike a direct listing, Dutch auctions raise new capital.
Are IPO stocks good investments?
Although IPOs can be good for the issuing companies, they're not always great for individual investors. Investing in IPOs can be profitable, but it is generally much riskier than investing in blue chip stocks or mature companies. The prices of newly issued stocks often fluctuate wildly on the first trading days because it's not always easy for the stock to find its equilibrium price.
However, IPO stocks can generate huge returns when they succeed. Some of today's top public companies completed their IPOs just a few years ago:
- Facebook parent Meta Platforms (NASDAQ:FB) debuted on the Nasdaq for $38 a share in 2012 and now trades at prices above $300.
- Tesla (TSLA -0.87%) priced its 2010 IPO at a split-adjusted $3.40 per share. The stock price skyrocketed in 2020 and is now above $1,000 a share, representing a gain of roughly 30,000%.
- E-commerce juggernaut Shopify (NYSE:SHOP) has jumped more than 6,000% from its 2015 IPO price of $17 to more than $1,000.
Of course, for every big IPO winner, there are a number of losers, most of which are quickly forgotten by the market. Lyft (LYFT +2.13%), for example, debuted in 2019 at $72, but it is down roughly 50% since then. The ridesharing company was hit hard by the COVID-19 pandemic, and visions of self-driving cars haven't been fulfilled. Earlier high-profile tech IPOs such as GoPro (GPRO +2.80%) and Fitbit also flopped, leading to billions of dollars in losses for investors.
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