At the time of the Boohoo Group (LSE: BOO) flotation in March 2014, the BBC ran the headline “Boohoo flotation to value fashion retailer at £560m.” I remember thinking that was a lot of money, perhaps too much.
At the time, ASOS, which had floated in 2001, had soared to what turned out to be its first major peak, and I thought that stock was seriously overvalued. A good time for the owners of Boohoo to come to market to get the best price they can, I thought. But perhaps not one that would favour the new investor.
Well, the ASOS price subsequently crashed, then climbed again, then crashed again. And Boohoo shares themselves had lost around 50% of their value a year after flotation.
But today, Boohoo has a market capitalisation of £3,660m — over six and a half times its IPO valuation. Even with the early price slump, you could have turned £10,000 into more than £65,000 in just under six years.
So does that make getting in at IPO a good strategy?
It’s often the second wave in a new market that makes the money, and Boohoo has managed to avoid the mistakes made by ASOS. But my answer is still no. After all, if you’d waited a year until the initial exuberance settled, you could have had twice the profit in a shorter time.
IPO disaster
I thought about the Boohoo IPO when I was looking at guarantor loan company Amigo Holdings. Amigo floated in 2018, but it only saw its shares above the offer price for a few brief early spells. If you’d bought on the day, you’d be nursing a loss of more than 80% today.
There are fears of a regulatory crackdown, and the firm’s biggest shareholder is selling. All in all, that was a disastrous IPO for investors — but not for the company’s founders, who pocketed a packet.
But some IPOs must surely be good investments, mustn’t they?
Another winner
Well, there’s Ocado (LSE: OCDO), which floated as an online supermarket as long ago as July 2010. Ocado shares are now 660% up on their initial offer price. And that, most definitely, is a cracking result in less than 10 years. But in my view, it was still a bad buy at IPO.
Management was greedy and tried to price the offering at 200p-275p. But analysts made it clear they thought that was overpriced. The offer price was reluctantly dropped to 180p, but the shares still opened around 163p in conditional trading.
The share price wasn’t able to remain sustainably ahead of the offer price until April 2013. And as late as October 2017, we were still looking at a gain of ‘only’ 60%. Not bad, but not the exciting growth result that many hoped for at flotation.
The Ocado share price started soaring only in 2018, as the company effectively transitioned from being an online supermarket to a provider of online trading technology.
The thing with Ocado, and with Boohoo, is that there was plenty of time for investors to watch how things went and make rational decisions based on actual performance rather than taking a gamble.
And waiting and watching gives you the opportunity to avoid IPO dogs like Amigo.
