Financial news magazines, pundits, television commentators, love to talk and to talk and to talk up IPOs ad nauseam. It makes you wonder, if IPOs are so glorious, so good and such an easy path to easy money, why anyone that is an insider at these IPO companies would ever even consider selling a share. While there have been some phenomenal IPOs, such as Google or Apple there have also been phenomenal flame-outs such as pets.com and etoys.com. Whether an IPO is a good investment or not depends on a lot of factors, such as the underlying value of the company, its growth rate, its return on equity, its market share, and its cache. The one thing that you seldom heard about is that IPOs and the astonishing returns such as Apple or Microsoft have generated will never occur again, or at least, will never occur again with the likes of Facebook or Google.
To get an appropriate picture of IPOs of today, we should compare them against a few from the previous century, starting with Apple Computer. When Apple's IPO came out on December 12, 1980, its market capitalization after the first day of trading was higher than any other IPO since Ford Motor Company of 1956, and the market capitalization of Apple was $1.778 billion at the close of business that day, making it a resounding success. Today, the market capitalization of Apple is the largest in the entire world at a staggering $669.94 billion, which is a percentage increase of 37,579%. Microsoft's IPO came out in 1986 and at the close of business on its first day of trading its market cap was $778 million, to which its closing price was substantially higher than its IPO offering of $21 whereas it closed at $27.75 a share. Today, the market capitalization of Microsoft, which at one time had the largest market capitalization of any stock in America, is $408.72 billion, which is a percentage increase of 52,434%. The stock that generated the most insane media frenzy during the 20th Century had to be Netscape, to which people were literally salivating to get in onto the deal. Netscape closed at $58.25 in 1995, making it the very first stock to more than double its IPO price on its very first day of public trading and giving it a market capitalization of $2.9 billion. However, over the next few years, Netscape essentially stagnated in the market, before being bought out in an all stock deal by AOL for $4.2 billion in 1999, or a percentage increase of 45%.
In the 21st century, there have been some mega IPOs but none of these will reach the heights and returns of Microsoft or Apple. For instance, there is Google which after its first day of trading in 2004 finished with a market capitalization of a very impressive $23 billion, today its market capitalization is $373.96 billion, which equates to spectacular 1,525% return. Facebook's IPO came out in 2012, in which after its first day of trading its market capitalization was $104.2 billion to which the underwriters of Facebook struggled all day to keep the stock above its IPO price, to which it was later to fall significantly under, only to recover quite strongly so as of today, it is worth some $209.4 billion, a percentage increase of 101%. Finally, there is Alibaba, the largest IPO in the history of public offerings, which upon its 1st day of trading in 2014 had a market capitalization of a simply unfathomable $231 billion, and currently is at $286.6 billion, a percentage increase of 24%.
Obviously, the IPOs of the 21st century have had not the longevity of Apple or Microsoft, but comparing Microsoft's IPO v. Google's IPO, over each of their first ten years, shows Microsoft cleaning Google's clock with a return of 9,151% to 1,525% which is an astonishing difference, especially considering that Google has been a monstrous success. The problem that Google, Facebook, and Alibaba have is simply the law of large numbers, that is to say, because their market capitalization was so high to begin with they will never reach the returns of Microsoft or Apple, especially in regards to Facebook and Alibaba in which any hope of matching these aforementioned titans is surreally pathetic. This doesn't mean that Facebook or Alibaba are necessarily bad investments, to date they have done quite well, what it does
mean is that there is no possibility that you can take a "toothpick" of an investment in them and hope to get anything of real substance in return. For instance, with Microsoft an investment in 1986 of 100 shares at $27.75 would have cost you $2775.00 + commission, but today after all their splits and even without taking into account any dividends that you would have received while owning Microsoft you would have a stock value of $1,424,448 or thereabouts with a corresponding dividend yield of 2.51% which equates to $35,754 annually in dividend payments just for the pleasure of owning the stock.