Wall Street and Main Street Beat up on Silicon Valley — How to Profit by Jumping Into the Action
- Wall Street and Main Street are forcing Silicon Valley to leave more upside on the table for small investors.
- Here’s what really happened to WeWork and how you can still call it a win.
- An IPO opportunity you can grab today. It’s on sale and getting ready to soar.
The WeWork IPO never got off the ground…
And that’s great news for the IPO market.
The market for initial public offerings is still outperforming the Russell 2000 Index by about 10%. But that edge is about to widen. And Main Street investors are going to be the big winners.
You see, WeWork’s failure to IPO this year actually puts a spotlight on a huge — and much-needed — shift that will benefit Main Street investors instead of the big Silicon Valley venture capitalists. Let me explain.
I love podcasts. I listen to them when driving, commuting, flying, running, walking and occasionally not sleeping in the middle of the night.
This weekend I listened to a podcast with Bill Gurley, a prominent Silicon Valley venture capitalist, or VC. In the podcast, Bill said that the IPO market isn’t working because investment banks are underpricing the IPOs.
The price of an IPO is set by the “market-clearing price.” That’s the price that satisfies both the buyers and the sellers. And that happens when a trade is made — when true supply meets true demand.
Gurley thinks that investment banks (Wall Street) are pricing IPOs below that price, causing them to pop by large percentages once they start trading on the market. Gurley sees this as investment banks enabling their clients to make easy money at the expense of the company.
But Gurley is not painting the full picture.
As a VC, it’s in his interest to overprice an IPO so that he can sell at the highest possible price. He knows that the amount of stock for sale after an initial public offering isn’t the amount of stock that always will be for sale.
You see, his shares are locked up. This means they cannot be sold for six months. That’s when the market-clearing price will become more apparent.
Gurley is blaming Wall Street for not managing the stock price higher for him and his Silicon Valley investor friends before the market-clearing price.
For once, Wall Street is actually teaming up with Main Street investors, like us, on this. By not pushing to get Silicon Valley’s premium valuations, it’s opened the door for us to make big bucks in IPO investing.
Coincidentally (or not), one of Gurley’s companies is WeWork.
Silicon Valley’s WeWork Fumble Puts Power Back Into Main Street’s Hands
WeWork has been hyping its IPO all year.
Its bombastic former CEO, Adam Neumann, has been making the rounds at the coolest tech events, talking about how WeWork is changing the world. It even changed its name to The We Company.
See, it was trying to market itself as a tech company. With this strategy, it also made about half a billion dollars’ worth of acquisitions, mostly of tech products vaguely applicable to its business.
It did this because tech companies trade higher than real estate companies. And let’s face it: WeWork is a real estate company.
Its main investor is venture capitalist SoftBank, run by celebrity investor Masayoshi Son. SoftBank is behind many of the most high-profile tech unicorns (Silicon Valley-speak for companies valued over $1 billion).
WeWork was supposed to be a home run for SoftBank.
SoftBank’s last investment supposedly valued the company at $47 billion, but SoftBank has invested close to $10 billion over many years. It used $47 billion as a valuation anchor for investors.
But Main Street investors had other ideas. Smaller investment banks, pension and mutual fund investors pushed back.
Together with Wall Street, they correctly saw WeWork as a tech-forward real estate company, not a technology company. And the company’s true investment valuation is closer to $24 billion.
With Main Street and Wall Street in agreement, they leaked that pushback to the press and institutional investors. Word spread to small investors, investment bankers and the financial media. They all joined together around the idea that WeWork and its Silicon Valley investors were trying to pull a fast one.
WeWork was forced to get rid of CEO Neumann, revise its corporate structure and shelve its IPO.
When WeWork comes back to the market, it will still be met with skepticism, but it will be a better, more focused company at a far lower price. Less upside for Silicon Valley and its pool of venture capitalists, more upside for the individual investor. That’s you.
Grab the Massive Upside in This IPO Sale Before It Explodes Higher
WeWork’s IPO fiasco will recalibrate Silicon Valley’s expectations lower, forcing it to leave more upside for small investors in future IPOs.
But this means there’s a great opportunity for you to target profits today.
As Paul Mampilly always says, we want to grab stocks that are going up.
The best way to do that and take advantage of this shift is with the Renaissance IPO ETF (NYSE: IPO).
This exchange-traded fund (ETF) buys trading IPOs and holds them for two years. Because Wall Street has teamed up with Main Street to beat up on Silicon Valley, future IPOs are now more likely to come in lower than their eventual market-clearing price.
And, because SoftBank has probably been selling some stock holdings to raise cash needed to carry WeWork until its IPO, the ETF is on sale.
Two of the holdings are prominent SoftBank positions: Uber and Slack. Selling in those stocks seems to have put pressure on the index, but the Renaissance IPO ETF is still beating the Russell 2000 Index by 9%, and it was up as much as 44% this summer.
As you can see, there’s plenty of upside here.
Editor, IPO Speculator