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Why might it not be smart to buy Uber on your day of IPO?



(CNN) – Should I buy shares of an initial public offering on its first trading day or wait a while to see how they work?

They say patience is a virtue. And that is especially true with recently public actions.

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It may seem tempting to buy Uber shares this Friday, the day of its anticipated initial public offering. But check out Uber's rival, Lyft and you'll see why that's not a great idea.

Lyft is now operating approximately 25% below its IPO due to concerns about how much money it is losing, competition with Uber and disappointing results in its first earnings report since it went public.

Average investors should look and wait when it comes to a moving IPO instead of diving in the early days, recommends Jim Price, a professor and entrepreneur residing at the Zell Lurie Institute at the University of Michigan Ross.

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“Stay out. These super hot IPOs are bet by institutional investors, ”says Price, referring to the large mutual funds and hedge funds that can buy an IPO at the sale price.

Inexperienced investors typically have to wait for a stock to start trading before they can buy, and often end up doing so with a large premium at the offer price.

Be careful with the lid

The plant-based hamburger company Beyond Meat valued its IPO at $ 25 last week, but the action opened at $ 46 and reached $ 85 a few days later, before going down to around $ 68.

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"The big institutions pocketed all the money in the first days of negotiation and know the exact moment in which they should shoot and sell," Price said. “Where does that leave individual investors? In a not very good place. ”

The price indicates that there is another reason to be patient with an IPO: some investors are prohibited from selling in the first months in which the shares are traded due to the so-called blocking period.

But once the company's founders and early-stage venture capital firms can legally sell, they can download some shares. That could push the shares down, because there will be a greater supply of shares in the market.

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"Allowing the dust to settle, maybe between two and six months, makes sense," Price said.

Another problem with many IPOs, and especially with Uber: like Lyft, they are bleeding red ink.

Focus on earnings, not sales

Many new companies are willing to spend a lot of money to gain market share. That can help them attract more venture capital money and help boost valuations of their private markets.

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But Wall Street investors are less tolerant of large losses. They want to see solid gains every quarter.

Companies like Google and Facebook have been able to do so largely from their IPOs. But other new high-profile companies that have been made public in the last decade, such as Twitter, Snap and Blue Apron? Not that much.

“Ultimately, the success of the Lyft and Uber IPOs will be judged based on the post-IPO performance and how these companies can maintain their growth while moving towards profitability and reducing their cash spending,” said Alex Castelli, advisory managing partner and the tax firm CohnReznick.

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In other words, it is possible that some companies are being made public simply to collect and not because they need the money or have a viable long-term plan. And those are what investors should watch very carefully.

“There is an old-school business saying. The revenue is for vanity and the benefits for sanity, ”said Jessica Rovello, CEO and co-founder of Arkadium, a gaming and interactive media firm. She said going public is not in her letters. She is happy staying in private.

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