Are New Age IPOs Worth Investing In?

New-age IPOs: The new-age IPOs, or technology-driven companies that function on platforms, have witnessed tremendous investment interest over the last few years. The new-age IPO offers rapid growth and the disruption of conventional sectors through its association with the digital economy. However, their performance post-listing has been erratic, and an important question that arises here is whether new-age IPOs are actually worthy of investment or just high-risk stories?

Recent Developments in New-Age IPOs

New age IPOs are largely those which are based on digital platforms. The key characteristic of new age firms is that they are more concerned about market share and scalability as opposed to more traditional firms which are more concerned about profitability. It would be clear from above examples that the kind of firms which have come to the Indian market in the “food delivery,” fintech, “e-commerce,” logistics, “SaaS based” spaces are examples of firms belonging to this segment. Some prominent examples of firms which belong to this segment are Zomato, Paytm, and Nykaa.

The Core Investment Attraction

What new-age IPOs offer the most is the potential for growth. New-age companies target massive untapped markets and use technology to grow-big, fast. If achieved, these companies can establish powerful network effects, high brand recall, and high operating leverage.

There is also early access. As IPO investors, individuals can gain early access to companies that have the potential to influence consumer behaviors or business models over many decades. It may seem similar to early-stage investments in what are today global technology giants to investors with early access.

The Profitability Challenge

Amongst one of the most significant apprehensions associated with new age IPOs is that they are not profitable on a constant basis. A significant number of IPO-giving organizations are still posting losses. These organizations are of the view that as soon as they are able to create mass, their profits will not be a concern.

High customer acquisition costs, a focus on discounts for growth, as well as competitiveness could lead to a lag in achieving profitability. It is essential for investors to assess whether the company’s loss could be strategic, temporary, or structural.

Valuation: Growth Versus Reality

Valuation can be another pertinent consideration in this context. In general, new-age IPOs tend to be valued either by looking at future projections instead of looking at their present financial performances. Concepts like price/earning ratio can’t be applicable in such scenarios.

This means that stock valuations are sensitive to market sentiment. If market sentiment is optimistic, stock values can jump. But if market conditions become tighter, as in the case of increased interest rates, these stocks can see sharp corrections.

Governance and Business Model Risks

But, along with the numbers, the investors need to look at the quality of governance, transparency, and execution skills. A good idea is insufficient. The caliber of the management’s leadership in controlling expenses, adjusting the strategy, and communicating effectively with the investors matters a lot.

Viability in business model also raises questions. Certain businesses rely to some extent on financing or favorable markets. They may find difficulty in entering the profits phase if financing becomes costly or markets change.

Who Should Consider Investing?

New age IPOs may not be ideal for all investors. New age IPOs are generally more suitable for investors who:

• Have a high risk tolerance
• Understand technology and platform economics
• Can stay invested through volatility
• Willing to allocate their portfolio partially

However, for a more conservative investor who is interested in income or return on investment, conventional businesses could be more suitable.

A Balanced Perspective

The IPOs belonging to the new age are not wealth creators per se or concepts that should be shunned altogether as investment options. They lie at the point where innovation meets risk. While some will be able to develop themselves into a robust, profitable entity, others could end up struggling to remain justified by their valuation multiples.

It is all about selectivity. Investors need to sift through the hype, learn about the fundamentals, and have realistic expectations. If done with caution, innovative IPOs can have a limited but important role in an investor’s diversified portfolio.