IPO Is a Warm Gun

Markets can remain irrational longer than you can stay solvent

-John Maynard Keynes

I'm already finishing my Bachelor's Thesis as we speak and I'll post my work here as soon as I'm done. But meanwhile, I have to write about something that has started to keep me up at night (not seriously, I sleep like a baby).

Fondia, Next Games and Suomen Hoivatilat are some of the fresh Finnish firms that have had their initial public offering (IPO) to the Helsinki Stock Exchange during the early months of 2017. Right across the Atlantic Snapchat Inc. has also listed to the New York Stock Exchange with a considerable company valuation. Meanwhile companies and organizations like Nitro Games, Kamux and even AC Milan have considered to list themselves to the stock-market. Also sports-car manufacturer Ferrari has listed to the stock market and you can buy the company shares.

The booming amount of initial public offerings is very frighting. Let me explain why.

The main motivation for the companies who consider initial public offering is to raise capital. If the company thinks that its shares are alluring and potentially bought in the stock market by the investors, this offers the company a way to raise capital to run the business.

One reason for the boom of initial public offerings is the clear fact that companies believe that their shares will be exchanged and bought in a way that would bring the company capital from the investors. If even more and  more companies are listing, that tells us that there exist estimations of a considerable amount of investors willing to invest their wealth in the stock market. Especially during the times of extremely low interest rates, more and more people are looking more profitable ways to invest their money from their bank accounts.

Low-interest rates and news that encourage the common man to start investing in order to receive profits allures more people and more capital to the stock market. This is something that I face in my job every time when advising people in their savings and investments. People start to invest for the sake of investing, not for the sake of the values of financial instruments themselves or the future cash flows of the listed companies.

Investing for the sake of investing raises the valuations of the stock market considerably. The valuations in the the US' indices are currently in all-time high. In the same time, more companies are listing to gain from the investment mania.The valuations start to base m.ore on the supply and demand of the shares than the company financials and  future cash-flows

The stock-market isn't always about revenues, profits, P/E-ratios, ROE's or alpha-values. It is about psychology. The value of the stocks in the stock markets are mostly determined by the supply and the demand of the particular stock. If the investors sense easy money and stocks with alluring valuations, they will with high probability buy that stock. If analysts recommend a stock, its demand will usually rise in the short run because investors want to be part of the future profits.

Tesla Motors Inc. just rose past Ford and GM to become the most-valued car company in the United States. And let's face it, that's very sexy. The stock value has soared over 40 % since January, even if the press release from Q4 reported a company loss of 600 million dollars. Tesla is valued more than GM, even though General Motors sold millions of cars in Q4 and Tesla only 70 000. People (and me) love the story of Tesla and Elon Musk and are waiting for the roll-out of the Model 3. The investors want to believe and that's why they are bullish on the stock, no matter what the revenue of the company is going to be or is at the moment.

Inderes is a Finnish analyst-company. Today 12.4 Inderes told that they would raise CapMan on their top-3 shares. The result? The stock booming to +4,14 %. Similarly when Nordea Markets thought that Metsä Board is going to gain from the global price-level of  pulp and the revaluation of the US dollar, the stock boomed almost a week in a row. That probably tells us something about the investors' knowledge, experience and ability to process new information. The markets are over-reacting.

The situation is something that I'm very worried about. We live in a situation where a company can literally beat up their own client in an airplane without any effect for the company valuation in the stock market. Swedish investor and venture capitalist Rune Andersson called the situation "pure sickness" in March and sold all of his stocks from the stock market.

The risks for a bubble are there. But still most of the companies are constantly increasing their profits and the economy is growing. The valuations are justified, IF the companies can answer for these valuations by growing their revenues during the next 3 years. That's why personally I wouldn't say that a bubble is certain, but it is still possible. The foreign doctrine of the Trump administration, the French Presidential election, and the geopolitical conflicts in Syria and North-Korea can easily turn the tables anytime.

Nevertheless, I'm still defying gravity and trying my luck with Tesla. No risk, no fun.

Text: SW
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