Birkenstock went public today on the NYSE using the ticker symbol BIRK. It initially opened at $41 per share and closed down at $40.20. This is below the estimate the company used in its roadshow presentation of $44 – $49 and is being talked about as a disappointment for the stock. 

Valuing IPOs is hard. I think it is one of the hardest things to do in the finance universe. Thus, most investors just sit IPOs out and the experts recommend that retail investors at home do as well. In this article we will discuss the reasons why IPOs are hard to trade and why so many people stay away.

Underwriters

Goldman Sachs, JP Morgan, and Morgan Stanley brought Birkenstock to the market today for its IPO. There aren’t any other IPOs happening now so it is safe to assume Birkenstock had the underwriters’ A teams working with them on this deal. The underwriters’ role is to find enough buyers at an initial price so that they can buy all the offerings shares from the company and then resell them to the buyers. The company wants to sell their shares for the highest price possible. The buyers want a good deal and hope that the price was estimated too low so they can flip their new shares once they start trading in the market.

The buyers are favored clients of the underwriting companies and the amount of shares each client can buy is capped. Since the shares are not publicly available until they start trading, the underwriters and initial buyers are hoping that there will be a huge demand for shares and the price will pop. If it doesn’t pop, like Birkenstocks’ price today, then the initial buyers and the media often call it a failed IPO.

The company on the other hand isn’t motivated at all to have a price pop on its opening day. They want the highest price possible from the underwriters because they only get one shot at raising money by selling shares.

Traders and Investors

Investors who don’t have favored client status with the underwriters often shy away from investing in IPOs until more information is made available and a stable market price has been established. The company executives meet with the underwriters clients privately and try to persuade them to invest. They don’t hold investor conference calls, put out quarterly earnings reports, or answer questions from the media in public interviews. Investors who use those resources to research their investments just wait a few quarters until those resources are available.

Momentum and technical analysis traders also stay away from IPOs. These traders rely on charts or trading histories to gauge which way they think the prices will move next.

Option and future traders can’t get in on the IPO fun because there just aren’t any option contracts available to buy or sell.

Who is left?

So who would clamor to buy the stock of an IPO the first day it was offered? First, there are lemming retail investors who chase the newest shiny stock. Second, long term value investors who use cash flows and business projections to value the intrinsic worth of companies and decide that the price is below its long term value. Finally, there are day traders who are anticipating the first day price pop and try to get in on the rise and get out before it falls. Who am I missing? Comment below.

I will make a best effort in tomorrow’s article to value BIRK with the documents available on their investors website.