Benjamin Felix

10 of the 11 IPOs underperformed the market within three years with average underperformance of roughly 50% relative to the market from the offer price and 60% from the first day close.

So we see there actually was a pop because if you bought at first day close, you did worse.

Doesn't look good.

It looks worse than the average IPO.

Now, when I was emailing with Professor Ritter, he also mentioned that these examples, yes, they had low floats.

They also tended to have high price to sales ratios at the time of the IPO.

Now, again, that's relevant for these current potential mega IPOs.

If SpaceX were to achieve its $1.75 trillion valuation, let alone its $2 trillion valuation that I've seen more recently,

it would have a price to sales ratio of more than 100 times based on trailing sales.

Wild.

Now, why does that matter?

Professor Ritter also showed, and this is one of the things that's not in my video on this, Professor Ritter also showed me the data for all IPOs, so not just low float IPOs anymore, all IPOs sorted on their price to sales ratio.

Measured from the first close, the market adjusted three-year buy and hold return decreases with an increasing price to sales ratio for IPOs of companies with sales over 100 million.

No surprise, I guess, valuations matter even for IPOs.

What does the price to sales of 100 times mean?

Just for context, the highest price to sales ratio for a public S&P 500 constituent is Palantir, which at the time that I wrote these notes had 73 time ratio, price to sales of 73.

The index as a whole, the S&P 500 trades at a price to sales of 3.1 times.

Now in general, as listeners know, high valuations are associated with low expected returns and these current private companies seem to have very high valuations or are expecting very high valuations when they list.

For index fund investors, the problem is pretty complicated.

Large private companies go public with high valuations.