Should You Invest in IPOs?
SpaceX’s arrival on the stock market has brought initial public offerings back to the centre of investors’ attention.
The rocket, satellite and artificial intelligence company priced its shares at $135 before they began trading on the Nasdaq on 12 June 2026. The shares opened at $150 and finished their first day at $160.95, approximately 19% above the offer price. SpaceX initially raised $75 billion, making it the largest IPO on record, and ended its first day with a market value of approximately $2.1 trillion. The exercise of an additional purchase option by its underwriters subsequently increased the total proceeds to approximately $85.7 billion.
The prospect of investing in SpaceX was understandably exciting. The company owns an established satellite-launch business, operates the Starlink communications network and is associated with ambitious plans that could reshape the space industry.
Other highly valued private technology companies may soon follow it onto the public market.
Anthropic, the artificial intelligence company behind Claude, confidentially submitted a draft registration statement to the US Securities and Exchange Commission in June 2026. OpenAI subsequently confirmed that it had also submitted a confidential draft registration statement. However, neither company has confirmed a listing date, the number of shares it might sell or the valuation at which an offering would take place. OpenAI has specifically stated that it has not decided when to take further action and may remain private for some time. They should therefore be described as potential forthcoming IPOs rather than confirmed upcoming listings.
The opportunity to invest directly in companies such as SpaceX, Anthropic and OpenAI is likely to attract enormous attention. They are associated with technologies that may transform communications, computing, scientific research and large parts of the global economy.
However, investors must make an important distinction:
A transformative company is not necessarily an attractive investment at every price.
The success of the underlying business is only one part of the investment equation. The return received by shareholders also depends on the price paid for the company and how much future success is already reflected in that price.
This distinction is particularly important when considering IPOs.
Newly listed companies frequently generate spectacular headlines on their first day of trading. However, the gains reported in those headlines are often measured from a price that ordinary investors could not obtain. Once the shares are freely available on the public market, the price may already incorporate an enormous amount of excitement and optimism.
Much of the evidence discussed below is drawn from episodes 134 and 139 of the Rational Reminder podcast. Episode 134 examines the historical performance and lottery-like characteristics of IPOs, whilst episode 139 features Professor Jay Ritter of the University of Florida, one of the most influential academic researchers on IPO pricing, issuance cycles and long-term performance (Rational Reminder 2021a, 2021b).
What Is an IPO?
An initial public offering, or IPO, occurs when a privately owned company offers shares to public investors for the first time.
Before trading begins on a stock exchange, the company and its investment banks agree an offer price. Shares are then allocated to investors through the banks managing the flotation.
Once public trading begins, the market determines a new price based on supply and demand.
For example, suppose a company sells its IPO shares for £20 each. Strong demand causes the shares to begin trading at £28.
The first-day return from the offer price is:
First-day return = (£28 − £20) / £20
First-day return = 40%
This immediate increase is commonly described as an ‘IPO pop’.
A 40% return in a single day naturally looks attractive. However, it does not necessarily represent a return that was available to an ordinary investor.
The important question is who was able to purchase the shares for £20.
Most Investors Cannot Reliably Access the IPO Pop
IPO shares are not generally distributed equally amongst everyone who wants them.
The investment banks managing the offering allocate a limited number of shares to selected investors. Large institutional investors and important brokerage clients are often more likely to receive meaningful allocations, particularly where an IPO is heavily oversubscribed.
Tim Jenkinson, Howard Jones and Felix Suntheim analyse detailed allocation records covering 220 IPOs that collectively raised approximately $160 billion. They find that allocations are influenced both by the information investors provide during the bookbuilding process and by the revenues those investors generate for the investment banks. The relationship between investor revenues and allocations is particularly strong for more desirable offerings (Jenkinson, Jones, and Suntheim 2018).
The most desirable IPOs are also likely to be the hardest to access.
This creates a selection problem for smaller investors. When an offering is expected to produce a large first-day gain, demand may substantially exceed the number of available shares. Investors may receive only a small allocation or none at all.
When demand is weak and shares are easy to obtain, the offering may be less attractive in the first place.
An ordinary investor may therefore be more likely to purchase the shares only once public trading has begun.
Returning to the earlier example, the investor does not buy at the £20 offer price. They buy closer to the £28 market price.
For that investor, the previously reported 40% gain is irrelevant. The relevant question is whether the shares are an attractive investment at £28.
The same distinction applies to SpaceX.
Its approximately 19% first-day increase was measured from the $135 IPO price. An investor buying once the shares had begun trading did not earn that full return. They purchased at a higher market price, after at least some of the initial excitement had already been incorporated.
Why Are IPOs Underpriced?
IPOs have historically tended to begin trading above their offer prices.
This is known as IPO underpricing. It refers to the difference between the price paid by investors receiving the original allocation and the price established when the shares begin trading publicly.
Alexander Ljungqvist’s review of the academic literature discusses several possible explanations for this effect. These include uncertainty about the value of a young company, differences in the information available to investors and the need to encourage investors to reveal information during the bookbuilding process (Ljungqvist 2007).
During bookbuilding, institutional investors indicate how many shares they want and the prices they may be prepared to pay. This information helps the investment banks assess demand and determine an offer price.
Investors have little reason to provide useful information without some form of reward. Allocating shares at a price that is likely to increase once trading begins can compensate them for participating in the process and accepting the uncertainty surrounding the offering.
Some degree of underpricing may therefore help an IPO succeed.
However, exceptionally large first-day gains raise a further question.
Why did the company not simply sell its shares at a higher price?
A large IPO pop represents money that the issuing company could potentially have raised. If shares are sold for £20 and immediately trade at £28, the original owners have effectively transferred part of the company to the allocated investors for less than the public market was prepared to pay.
Jay Ritter and Tim Loughran refer to the difference between the offer price and the first-day closing price as ‘money left on the table’ (Loughran and Ritter 2002).
The interests of the different parties are not perfectly aligned.
The company and its existing owners generally want to raise as much money as reasonably possible. Investors receiving allocations benefit from a lower offer price and a larger first-day gain. The investment bank sits between the two and may also value its long-term relationships with institutional investors. The investment bank is thus trying to strike a balance and so some underpricing is the expected outcome.
Loughran and Ritter find that average US IPO first-day returns were approximately 7% during the 1980s, almost 15% between 1990 and 1998, and 65% during the internet bubble of 1999 and 2000. Average underpricing then declined to approximately 12% between 2001 and 2003 (Loughran and Ritter 2004).
This variation suggests that underpricing is not determined solely by the unavoidable cost of taking a company public. Market conditions, investor sentiment and the incentives of issuers and underwriters also matter.
A large first-day increase may therefore be good news for the investors who received the original shares, but it is not necessarily evidence that the IPO was efficiently priced for the company selling them.
What Happens After the First Day?
The long-term performance of an IPO can be measured in different ways.
Someone receiving shares at the offer price may benefit from the first-day increase. However, most public market investors are more interested in returns after the shares have begun trading.
This distinction changes the picture considerably.
Jay Ritter’s influential 1991 study examines 1,526 US companies that completed IPOs between 1975 and 1984. Over the following three years, the IPO companies produced an average total return of 34.5%, compared with 61.9% for a group of comparable existing listed companies (Ritter 1991).
Tim Loughran and Jay Ritter later examine new share issues between 1970 and 1990. They find that companies completing IPOs produced average returns of approximately 5% per year over the following five years. The results became known as part of the ‘new issues puzzle’: companies appeared able to raise money from public investors shortly before producing unusually weak subsequent returns (Loughran and Ritter 1995).
Ritter’s updated data, discussed in Rational Reminder episode 134, show that IPOs issued between 1980 and 2018 underperformed the overall market by a cumulative 17.5% during their first three years of public trading. They also underperformed a style-matched benchmark by 6.6% (Rational Reminder 2021a).
These studies are important, but their results require careful interpretation.
The evidence does not mean that every IPO subsequently performs badly. It also does not necessarily prove that the market systematically misprices every newly listed company.
IPOs tend to possess particular characteristics. They are often smaller businesses, trade at relatively high prices compared with their fundamentals, have weak current profitability and invest aggressively in future growth.
These characteristics are themselves associated with differences in expected returns.
The central question is therefore whether IPOs underperform simply because they are IPOs, or because they resemble other expensive, weakly profitable growth companies.
IPO Companies Often Resemble Small Growth Stocks
Dimensional Fund Advisors studied more than 6,000 US IPOs issued between January 1991 and December 2018.
The researchers constructed a hypothetical market-capitalisation-weighted portfolio containing companies that had completed an IPO during the preceding 12 months. The first-day return was excluded because capturing it would generally require an allocation at the offer price.
The portfolio of newly listed companies underperformed the broader US market by approximately 2% per year and experienced greater volatility. However, much of the return difference was explained by the portfolio’s exposure to the Fama-French five factors (Dimensional Fund Advisors 2019).
As a group, the IPO companies behaved like small growth businesses with weak profitability and aggressive investment.
This is an important qualification.
It suggests that IPO status may not be a unique source of poor expected returns. Newly listed companies often possess a collection of characteristics that have historically been associated with lower returns.
A typical IPO company may be:
Relatively small.
Expensive compared with its current assets, earnings or sales.
Weakly profitable or loss-making.
Reinvesting heavily to expand.
Dependent on optimistic expectations about future growth.
The company may have an excellent product and rapidly increasing revenue. That still does not tell us whether its shares are attractively priced.
A good company is not automatically a good investment.
The Price Already Reflects a Story
Suppose an artificial intelligence company is expected to increase its revenue by 40% per year.
That sounds impressive, but the growth rate alone tells us very little about the expected return from its shares.
Investors may already have paid a price that assumes the company will achieve this growth. The share price might even require the company to exceed those expectations for many years.
The question is not simply:
‘Will this company grow?’
It is:
‘Will the company perform better than the expectations currently reflected in its valuation?’
A company can develop an important technology, gain customers and increase its revenue substantially, yet still produce disappointing returns for shareholders.
This can happen because the business fails to meet the market’s original expectations. It can also happen because the company performs well, but not well enough to justify the exceptionally high price investors initially paid.
SpaceX illustrates how demanding an IPO valuation can become. At its $135 offer price, Reuters estimated that the company was valued at approximately 94 times its trailing annual sales. That was substantially higher than the sales multiples of several established technology companies.
This does not prove that SpaceX shares were incorrectly priced. Its future growth may differ materially from that of established technology companies, and a simple price-to-sales comparison cannot capture every difference between businesses.
However, the valuation demonstrates the scale of the expectations already embedded in the price.
The difference between a company and its shares is fundamental.
The company represents a business, its products and its future cash flows.
The shares represent a claim on those cash flows purchased at a particular price.
Excitement about the business should not replace an assessment of the price.
IPOs as Lottery Tickets
One reason investors find IPOs so attractive is that their possible returns are often positively skewed.
A positively skewed investment has many ordinary or poor potential outcomes but a small possibility of an exceptionally large gain.
This resembles a lottery ticket.
The probability of an extreme success may be low, but the scale of the possible reward makes the investment feel attractive.
When investors consider SpaceX, Anthropic or OpenAI, it is easy to imagine the most optimistic possible outcome. One of these companies could potentially dominate a major new industry and become considerably more valuable.
The successful historical examples are also easy to remember.
Investors imagine having purchased shares in Amazon, Google or another exceptional company near the beginning of its public life. The many IPOs that subsequently declined, disappeared or produced mediocre returns are discussed far less often.
T. Clifton Green and Byoung-Hyoun Hwang examine this preference in ‘IPOs as Lotteries: Skewness Preference and First-Day Returns’.
They find that IPOs with greater expected skewness experience larger first-day returns. The effect is stronger during periods of high investor sentiment. However, the same companies subsequently produce more negative abnormal returns over the following one to five years (Green and Hwang 2012).
The researchers also find that greater expected skewness is associated with a larger proportion of small trades during the first day of public trading. They interpret this as evidence consistent with shares moving from institutional investors towards individual investors who are particularly attracted to lottery-like pay-offs (Green and Hwang 2012).
This produces a possible pattern:
Institutional investors receive the shares at the offer price.
The shares rise when trading begins.
Individual investors purchase them at the higher public market price.
The qualities that make an IPO exciting may therefore contribute to the price that makes its expected return less attractive.
Investors are not necessarily paying only for expected future profits. They may also be paying for the small possibility of owning the next extraordinary winner.
A Few Winners Can Dominate the Results
The skewness of individual company returns creates a further problem.
A diversified portfolio of IPOs may produce an acceptable result even where most of the individual companies perform badly, provided that it owns one or two enormous winners.
Imagine a portfolio containing ten newly listed companies.
Six lose most of their value.
Three produce modest positive returns.
One increases by 1,000%.
The one exceptional company may offset much of the damage from the others.
However, an individual investor purchasing only one or two popular IPOs has a high probability of missing that winner. They retain the concentration risk without holding enough companies to benefit reliably from the extreme positive outcome.
This is similar to venture capital.
A venture capital fund expects many investments to fail. Its success can depend on a small number of companies producing exceptionally large gains.
In Rational Reminder episode 139, Ritter gives the example of venture capital funds associated with Kleiner Perkins and Sequoia Capital around the internet bubble. Many of the underlying businesses failed, but an investment in Google was capable of outweighing numerous unsuccessful holdings (Rational Reminder 2021b).
That approach depends on diversification across a large number of speculative companies.
It cannot easily be replicated by an ordinary investor selecting one or two exciting IPOs after reading about them in the news.
Why Do IPOs Arrive in Waves?
IPO activity tends to occur in clusters rather than being distributed evenly through time.
Companies are more likely to go public when stock market valuations are high, investor sentiment is strong and recent IPOs have performed well.
These periods are commonly described as ‘hot issue’ markets.
The pattern is logical from the perspective of the company and its existing owners.
When public investors are prepared to pay unusually high prices, it may be an attractive time to sell part of the business. Strong recent IPO performance can also make a flotation easier to market.
However, market conditions that are attractive for sellers are not necessarily attractive for buyers.
Loughran and Ritter’s research on new issues shows that IPO volume and underpricing vary substantially over time. Ritter’s wider body of work also documents repeated cycles in IPO activity, first-day returns and subsequent performance (Loughran and Ritter 1995, 2004; Ritter and Welch 2002).
Technological change can make these waves particularly powerful.
A genuinely transformative technology produces real companies, real revenue opportunities and real economic growth. It can also produce excessive investor optimism.
These two statements can be true at the same time.
The internet genuinely changed the global economy. That did not mean every internet company listed during the technology bubble was a good investment.
Artificial intelligence may also have a profound economic effect. That does not establish that every AI company will succeed or that any valuation is reasonable.
Correctly predicting the importance of a technology is different from correctly identifying the companies that will capture its profits.
Even identifying the eventual winners is not sufficient if their shares are purchased at prices that already assume extraordinary success.
How Long Does IPO Underperformance Persist?
The evidence does not suggest that companies remain permanently unattractive simply because they once completed an IPO.
Daniel Hoechle, Larissa Karthaus and Markus Schmid examine 7,487 US IPOs completed between 1975 and 2014.
They find that IPO companies significantly underperform mature listed businesses during approximately their first two years on the market, with the weakest abnormal performance occurring around one year after the flotation. The abnormal underperformance then declines and becomes statistically insignificant after approximately two years (Hoechle, Karthaus, and Schmid 2017).
Being an IPO Is Temporary
After a company has traded publicly for several years, accumulated a longer financial record and passed through the initial period of excitement, it becomes an ordinary listed business.
Investors can then assess its valuation, profitability and prospects alongside thousands of other companies.
There is rarely a need to buy immediately.
Waiting does not guarantee a lower price. The shares of a successful company may continue to rise. However, waiting can provide additional information and reduce the pressure to make a decision during the period when attention and uncertainty are at their highest.
Are Larger IPOs Different?
The weakest historical performance has often been concentrated amongst smaller and more speculative offerings.
In Rational Reminder episode 139, Ritter explains that larger IPO companies have historically performed better than the smallest new listings. The severe long-term underperformance frequently associated with IPOs is therefore not equally distributed across every company (Rational Reminder 2021b).
This matters when considering companies such as SpaceX, Anthropic and OpenAI.
They do not resemble tiny, early-stage businesses entering the stock market with little revenue and an unproven product. They are large companies with established operations, major investors and substantial commercial activity.
Companies also tend to remain private for longer than they once did. By the time they enter the public market, much of their early development and growth may already have occurred.
That can reduce some business risk but it does not eliminate valuation risk.
A mature, successful company can still be a poor investment if the price assumes implausibly high future growth. In fact, the company’s fame and apparent quality may encourage investors to accept a particularly demanding valuation.
The relevant conclusion is not that every large IPO should be avoided.
It is that company quality and investment value must be considered separately.
What About Investing in Every IPO?
An investor might attempt to avoid the difficulty of selecting individual winners by purchasing a diversified portfolio of newly listed companies.
This reduces company-specific risk, but it does not remove the characteristics shared by IPO businesses.
The portfolio may remain concentrated in companies that are relatively small, expensive, weakly profitable and investing aggressively.
An IPO fund may also experience substantial turnover. Companies are purchased when they list and removed after they no longer qualify as recent IPOs. Fund fees, trading costs and the difference between offer prices and publicly available prices can further reduce returns.
A broad global equity index already provides exposure to successful IPO companies once they satisfy the index provider’s inclusion requirements.
Investors do not need to identify the winners in advance.
As a successful company grows, its market value and weight in the index generally increase. An unsuccessful company declines to a small weight or eventually disappears.
This approach will not capture the gain between the IPO offer price and the first public trade.
However, that return is not consistently available to ordinary investors anyway.
How Should Investors Approach SpaceX, Anthropic or OpenAI?
SpaceX provides a useful real-world example of the distinction between a company and its valuation.
An investor may reasonably believe that SpaceX possesses valuable technology, important infrastructure and substantial growth opportunities.
That belief alone does not establish that the shares offer a high expected return at a valuation of approximately $2 trillion.
The investor must consider how much future growth is required to justify that price, the profits that may eventually become available to shareholders, the risks surrounding those profits and the possibility that the current valuation already reflects an exceptionally favourable outcome.
The same reasoning will apply if Anthropic or OpenAI completes an IPO.
Investors should not ask only whether artificial intelligence is likely to be important.
They should consider:
How much revenue can the company realistically produce?
How much of that revenue might become sustainable profit?
How much additional capital will the company require?
How intense will competition become?
Will customers remain loyal as new models are introduced?
Can the company maintain a durable advantage?
What proportion of its expected success is already reflected in the IPO valuation?
A Sensible Approach to IPO Investing
The evidence does not support a simple rule that every IPO should be avoided. Some newly listed companies will become highly successful investments. Larger and more established IPOs may also differ considerably from small speculative flotations. However, investors should be cautious where:
The company is extremely small or highly speculative.
The business has little current revenue and no clear route to profitability.
The valuation depends on exceptionally optimistic long-term growth.
The shares have received intense media or social media attention.
The company operates in a fashionable industry experiencing an IPO wave.
The main attraction is the possibility of finding ‘the next’ famous winner.
The shares have already risen sharply before the investor can purchase them.
The investor intends to place a large proportion of their portfolio in a single company.
None of these characteristics guarantees a poor result.
Together, they increase the possibility that an investor is paying an unusually high price for optimism, attention and positive skewness.
An investor determined to purchase an individual IPO could reduce the potential damage by treating it as a small speculative part of an otherwise diversified portfolio.
However, it should be recognised as speculation rather than a reliable way to earn superior returns.
Conclusion
IPOs provide compelling stories. They allow investors to purchase shares in a company at the beginning of its life on the public market. A small number of these businesses will become enormously successful, and some early shareholders will earn exceptional returns.
SpaceX’s record-breaking flotation has renewed this excitement. The potential listings of Anthropic and OpenAI may intensify it further. However, the most visible IPO returns are often calculated from an offer price that many ordinary investors cannot access. By the time the shares begin trading publicly, their price may already reflect extraordinary enthusiasm and ambitious assumptions about the future.
Jay Ritter’s research documents the historical tendency for IPO companies to produce weak long-term returns, particularly amongst smaller offerings. Loughran and Ritter show that companies often issue shares during favourable market conditions, whilst Green and Hwang demonstrate that the most lottery-like IPOs can attract higher first-day valuations followed by weaker subsequent performance (Ritter 1991; Loughran and Ritter 1995; Green and Hwang 2012).
Other research adds important nuance. Much of the historical underperformance can be linked to the tendency for IPO companies to resemble small, expensive, weakly profitable businesses that invest aggressively. The effect also appears to be strongest during the first years following the flotation rather than continuing permanently (Dimensional Fund Advisors 2019; Hoechle, Karthaus, and Schmid 2017).
This evidence does not tell us that SpaceX, Anthropic or OpenAI will fail. It tells us that their importance, growth and technological potential do not automatically make their shares attractive at any price. The most exciting company can still be a disappointing investment.
For most investors, a diversified portfolio provides exposure to the companies that eventually succeed without requiring them to predict which heavily promoted IPO will become the rare exceptional winner.
References
Dimensional Fund Advisors. 2019. ‘IPOs: Profiles Are High. What About Returns?’
Green, T. Clifton, and Byoung-Hyoun Hwang. 2012. ‘IPOs as Lotteries: Skewness Preference and First-Day Returns.’ Management Science 58 (2): 432–444.
Hoechle, Daniel, Larissa M. Karthaus, and Markus Schmid. 2017. ‘The Long-Term Performance of IPOs, Revisited.’ Swiss Institute of Banking and Finance Working Paper 2017/06.
Jenkinson, Tim, Howard Jones, and Felix Suntheim. 2018. ‘Quid Pro Quo? What Factors Influence IPO Allocations to Investors?’ The Journal of Finance 73 (5): 2303–2341.
Ljungqvist, Alexander. 2007. ‘IPO Underpricing.’ In Handbook of Empirical Corporate Finance, edited by B. Espen Eckbo, 375–422. Amsterdam: Elsevier.
Loughran, Tim, and Jay R. Ritter. 1995. ‘The New Issues Puzzle.’ The Journal of Finance 50 (1): 23–51.
Loughran, Tim, and Jay R. Ritter. 2002. ‘Why Don’t Issuers Get Upset About Leaving Money on the Table in IPOs?’ The Review of Financial Studies 15 (2): 413–444.
Loughran, Tim, and Jay R. Ritter. 2004. ‘Why Has IPO Underpricing Changed Over Time?’ Financial Management 33 (3): 5–37.
Rational Reminder. 2021a. ‘Episode 134: The IPO Lottery, Planning for Wellness, and Talking Cents.’ 28 January.
Rational Reminder. 2021b. ‘Episode 139: Prof. Jay Ritter: IPOs, SPACs, and the Hot Issue Market of 2020.’ 4 March.
Ritter, Jay R. 1991. ‘The Long-Run Performance of Initial Public Offerings.’ The Journal of Finance 46 (1): 3–27.
Ritter, Jay R., and Ivo Welch. 2002. ‘A Review of IPO Activity, Pricing, and Allocations.’ The Journal of Finance 57 (4): 1795–1828.