Key Points
While many IPO stocks experience sharp gains in early trading, on average, they underperform over their first three and six months.
In its S-1 filing with the SEC, Anthropic listed some significant risk factors.
Anthropic just filed to go public, and investors are right to be excited, as it may be the biggest initial public offering (IPO) in history. The offering, which appears set to happen in November, is expected to raise as much as $100 billion and give the artificial intelligence (AI) company a valuation between $1.5 trillion and $2 trillion.
For those unfamiliar, Anthropic is the company behind the popular AI chatbot Claude. According to its S-1 filing with the Securities and Exchange Commission (SEC), it plans to list on the Nasdaq with the ticker "ANT."
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But investors should beware, as IPO stocks have a long history of disappointing early investors. I, for one, plan to avoid the stock until it's been publicly traded for at least six months.
IPOs are exciting, and that excitement often gives their shares an initial market boost. For companies that went public between 1980 and 2015, IPO stocks averaged a first-day return of 18%, according to research by Edward Jones. The technology stocks it studied did even better on their first days, with a 35.2% average increase.
However, those tech stocks were down by an average of 3% after three months and off by 14% after six months, according to that same research.
SpaceX's IPO is a great example
Just look at the IPO earlier this year of Elon Musk's Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX, as a prime example. The company went public on June 12, and its first trade was at $150 per share. Investors quickly bid the shares above $175 that day and pushed the price to a peak above $225 over the next few trading days.
But enthusiasm for the stock waned in succeeding weeks and months, and shares plummeted to about $108 in late July. Today they're trading at about $149, just below the price where they began trading in June. Perhaps investors concluded that the satellite, AI, and rocket-launch company was being over-hyped.
It has since become profitable, however, with net income of $4.4 billion in the third quarter. The delivery of its latest report gave the stock a boost last week, but it didn't last long. That may be because the company continues to make hefty capital expenditures, and the stock is also expensive, trading at 67 times trailing sales.
But SpaceX's post-IPO performance has not been an outlier. Longer-term studies have consistently concluded that stocks underperform the market over three and five years after their initial public offerings.
A separate study by Truist Financial examined 30 major IPOs in the software and tech spaces. While some popped on their first days (and many declined), every one of them experienced a significant drawdown at some point during its first year on the market.
AI poses "existential risks to humanity"
And Anthropic is a bit unusual, too. In its IPO filing with the SEC, management outlined some pretty serious concerns. The filing's "Risk Factors" section states that "sufficiently advanced AI systems could, if not developed, deployed, and operated with appropriate safeguards, oversight, and security measures, pose catastrophic or existential risks to humanity."
Perhaps less foreboding is that there's plenty of competition emerging from other companies looking to provide artificial intelligence services. They range from Alphabet (NASDAQ: GOOGL) and OpenAI to SpaceX's Grok, among many others. In fact, OpenAI decided to delay its own IPO until next year, at the earliest, amid growing concerns about the dangers posed by AI.
Image source: Getty Images.
All in all, rather than jumping into a stock shortly after its IPO, it's wiser to wait on the sidelines for a while, as better buying opportunities are likely to arise. That's particularly true in the case of exciting new arrivals like Anthropic.
The title of the Edward Jones research report kind of says it all: "Don't Let IPO Buzz Cloud Your Judgment."
Matthew Benjamin has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Truist Financial. The Motley Fool has a disclosure policy.