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Why did the Alphawave share price crash 20% on IPO?

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Alphawave (LSE: AWE) took a brave gamble floating on the London Stock Exchange on Thursday. The Canadian computer chip designer shunned the Nadaq in New York, which is a natural home for high-tech companies, and plumped for a listing in the UK. But within hours of its introduction at 410p, the Alphawave share price had crashed by 24%.

The shares did recover some of the loss by the time the market closed, ending on a 10% drop.

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But why such a disappointing start to life as a quoted company? Some commentators have suggested it’s a reflection of a lack of appetite for tech stocks among UK investors, and that London is hostile to new high-tech ventures.

Or are flotations like this usually led by US investors, who are focused on their home markets and don’t go for overseas listings?

Why I don’t buy at IPO

Perhaps it’s just a UK aversion to IPOs in general. We do, as it happens, have a record of some spectacular flops. The one uppermost in my mind is Aston Martin Lagonda, which came to market in London in 2018. Never mind the 20% fall for the Alphawave share price, Aston Martin went into a prompt nosedive. Within its first two years, its shares lost 90% of their initial value.

Then, more recently, we had Deliveroo and another impressive slump. Since its market debut at the end of March, Deliveroo shares are down 40%.

The great majority of flotations I’ve seen in my time have been in negative territory a year later — often alarmingly sooner. So why are stock flotations in the UK apparently such poison?

Generally, I won’t buy at IPO. The reason is they aren’t intended to benefit me, the buyer. No, the intention is to raise as much cash for the current owners as possible. And the timing and pricing are set to try to maximise that.

With Alphawave, the timing comes during a period of global chip shortages and rising demand. But if the timing looks good, that suggests the initial Alphawave share price was wrong.

Alphawave share price steadying?

But by the standards of many I’ve seen, I reckon Alphawave is actually off to a fairly decent start. The first day did begin badly, but I’m buoyed by seeing the pull-back later in the day. That close just 10% down suggests there’s a reasonable bit of support for the Alphawave share price out there, and the longer-term could be a lot better.

So would I buy Alphawave now? Well, I haven’t had a tech stock in my portfolio for some time, and that’s a gap I’d like to fill. The growing demand and increasing chip shortages could mean a good future for designers and suppliers in the industry too.

The problem with Alphawave is that I don’t have any fundamental valuations to go on. And I’d prefer to wait and see how the Alphawave share price settles too, at least over the next few months. But I do think it has potential… and it’s on my watch list.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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