Date
25 June 2017
Part of the reason why Amazon shares have gone up so much over the past 20 years is that the company went public when it was still quite small. Photo: Reuters
Part of the reason why Amazon shares have gone up so much over the past 20 years is that the company went public when it was still quite small. Photo: Reuters

Why finding a home-run IPO like Amazon is next to impossible

The personal wealth of Jeff Bezos, founder and chief executive of Amazon.com, has surpassed that of Zara’s Amancio Ortega and legendary investor Warren Buffett, and he is now the second richest person on the planet.

Bezos established Amazon in 1994, and when the firm went public, its market capitalization was still under US$600 million.

Who would have thought in two decades, Amazon’s market value could go up nearly 600 times.

The initial public offering of Google (now called Alphabet) is another investors’ dream come true, offering those who bought into the IPO a return of 20 times in 13 years.

Meanwhile, Facebook, which listed five years ago, also did well, rewarding investors with 270 percent cumulative return.

While all three turned out to be excellent investments, there is a key difference – the time it took them to go public.

For Amazon, it was three years, while Google took six years and Facebook waited eight years to list.

When Google listed, its market capitalization was US$29 billion. When Facebook listed, the company was already worth US$110 billion.

Since Facebook was considerably larger than Google and Amazon when it went public, it’s safe to say its IPO investors should not expect to get the kind of returns Amazon IPO buyers can get, assuming they have kept their shares until now.

Simple maths will tell us why this is so. For Facebook IPO investors to get a return of 600 times in 20 years’ time, the company’s market value would have to surpass the United States’ GDP, a very unlikely scenario.

Startups are in no hurry to list largely because funds in the private market are more than abundant.

The top five startups including firms like Uber and Airbnb have raised about US$30 billion in the private market over the past few years.

IPO investors should take note that by the time these yet-to-list tech giants reach the public market, their remaining upside could be limited.

The full article appeared in the Hong Kong Economic Journal in Chinese on April 3

Translation by Raymond Tsoi

[Chinese version 中文版]

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RT/CG

Columnist at the Hong Kong Economic Journal

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