You've Been Warned About Investing in IPOs

Editor's note: Even when a trend is poised for huge long-term gains, you can still lose money on the wrong stocks. In today's Weekend Edition, we're taking a break from our usual fare to cover the dangers of buying into overhyped market debuts. Our colleague Matt McCall shares a recent example of a company that led investors astray... and how you can avoid making this common mistake.

Investors went a little crazy...

Whenever a hot new company debuts on the public market, it draws a lot of attention. These stocks can sometimes double or even triple in their first day of trading as folks scramble to scoop up shares.

But be careful buying into this kind of hype.

It doesn't typically last long. And that can lead to quick losses for those early buyers.

We saw a perfect example of this last month...

Vietnamese electric-vehicle ("EV") maker VinFast Auto (VFS) debuted on the Nasdaq via a merger with special purpose acquisition company Black Spade Acquisition. Shares opened at $22 on August 15 and immediately spiked – closing the day at $37.06.

That's a nearly 70% jump.

The rally pushed VinFast's market capitalization to $85 billion – which is bigger than both BMW (BMWYY) and Volkswagen (VWAGY).

I'd say it was a successful launch. But here's the wrinkle...

In May, VinFast told investors that it plans to sell 50,000 EVs this year. But through July – before its August initial public offering ("IPO") – it had only sold 16,000 of them. It also sold just 137 of its VF 8 model in the U.S.

For comparison, Tesla (TSLA) sold about 466,000 EVs in its last quarter alone.

While VinFast is building a factory in North Carolina that will produce up to 150,000 vehicles annually, it won't be up and running until at least 2025.

So it's way behind in its sales goals – and has only sold a fraction of what other EV manufacturers have accomplished. It won't have the capacity to ramp up its production for a few years. And at its market debut, it was valued at $85 billion.

I find that... interesting.

I know a lot of folks are excited about VinFast's prospects. I'm more bullish on the future of EVs than most. But I'm also a smart investor, and I never ignore the facts in front of me.

Not only is VinFast's massive valuation incredibly hard to justify... but there's simply no way it should be worth more than two of the top carmakers in the world.

This reminds me of when popular EV maker Rivian Automotive (RIVN) hit the market back in November 2021. There was a lot of hype around the automaker, partly because it had a long line of customers waiting to get their hands on its cars.

That was enough for folks to race in and buy its shares. The stock more than doubled in its first few trading days. Then, reality set in...

At its peak, Rivian shares traded at $172.01 – pushing its market cap up to $153 billion. But that didn't last long. The stock turned lower quickly and has mostly fallen since. As you can see below, it's down about 70% from its IPO – and much more than that from its peak...

Today, Rivian has a market cap of a little more than $20 billion. And investors who bought in around its IPO and held their positions are sitting on big losses.

This is exactly why you want to be careful with new and popular IPOs. They can be exciting, sure – especially when they take off right away. But the hype almost always dies down, and then you're left holding a company that isn't worth what you thought it was.

As for VinFast, shares have already come down a lot from their recent peak. But I suspect more downside could be ahead... and shareholders will end up in a similar position as early buyers of Rivian.

You've been warned.

Here's to the future,

Matt McCall

Editor's note: On Tuesday, September 12, Matt is teaming up with Brett Eversole to talk about the future of this bull market. Their new prediction is focused on just 10 stocks... But these aren't the big tech stocks everyone else is obsessed with today.

So, if you're transfixed by the huge gains this year in stocks like Microsoft, Alphabet, Meta Platforms, and Nvidia... make sure you tune in. What happens next could be much more profitable – if you're willing to dig deeper than the hype. RSVP for the free online discussion here.