IPOs - David Kostin of Goldman Sachs On How To Spot If Arm and Instacart Will Be Successful - Fortune

2/1/24, 5:14 PM IPOs: David Kostin of Goldman Sachs on how to spot if Arm and Instacart will be successful | Fortune
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FINANCE · IPOS
Goldman Sachs has found the secret to a successful IPO listing:

Here are the two traits investors need to look for
BY ELEANOR PRINGLE
September 21, 2023 at 8:08 PM GMT+5:30
https://fortune.com/2023/09/21/goldman-sachs-david-kostin-ipo-arm-instacart-successful-characteristics/ 1/12
David Kostin, chief U.S. equity strategist for Goldman Sachs, scoured 5,000 IPOs to find a formula for success.
VICTOR J. BLUE/BLOOMBERG - GETTY IMAGES
With Arm and Instacart hailing blockbuster listings this month, it could be easy for investors
to get caught up in the excitement. But Goldman Sachs has another approach: it has
identified two key measures that can help predict how successful an IPO may be in the long
term, irrespective of whether the stocks have an early bubble or bust.
To identify these factors Goldman’s Chief U.S. Equity Strategist, David Kostin, and a team of
analysts sifted through 5,000 IPOs from the past 25 years.
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Their conclusion is that the U.S. IPO market has been in a two-year “drought” but that it is
finally bouncing back in “dramatic fashion” — returning to normal levels seen before the
volatility of the pandemic.
The note seen by Fortune shows that while there were more than 400 IPOs in 2020 to 2021,
just 32 U.S. firms floated in the past 21 months.
Yet the pre-pandemic buzz didn’t necessarily lead to a return for investors, Kostin points out:
“The 2020-21 wave of IPOs had abysmal performance relative to history. The median IPO
completed during 2020-21 lagged the Russell 3000 by 48 pp in the first 12 months following
its IPO, with just 18% managing to outperform.”
Companies that floated during this time weren’t necessarily bad investments, Kostin points
out, saying that many businesses were enticed out by low interest rates which promptly
leaped in 2022. Meanwhile, equity prices fell and so “the window slammed shut.”
But as the sector ramps up again, the age-old rule of quality of IPO, not quantity, should be
observed by investors looking for long-term gains.
Metrics to look out for

The two headline flotations of 2023 have certainly got off to a buzzy start.
Chip engineer Arm saw its share price jump nearly 25% in one day after it floated on the
Nasdaq, after selling shares at $51 — the upper end of its expected range.
This noise could have been predicted to some extent, Kostin writes, as stocks that are priced
above their expected range usually rise by 38% on their first day of trading.
“This effect was even more pronounced for deals completed since 2020,” he added. “IPOs
priced above the range typically jumped by 43% on their first day of trading. In contrast,
deals priced below the range were essentially flat on day one (+1%).”
Meanwhile, grocery delivery company Instacart saw shares pop 40% to open at $42 before
the price sank in the days following.
While not all investors are convinced by the offerings—ARK CEO Cathie Wood, for example,
said she steered clear of Arm because of its focus on AI—Kostin says floated companies have
some time to prove themselves.
His two signals to look for as an indication of a successful IPO are: “Greater than 40%
annualized sales growth in their second and third years after flotation and positive net
income by their eighth quarterly earnings report.
“Two-thirds of IPOs with these characteristics outperformed the Russell 3000 in their first
three years with the typical company outperforming by 22 pp.”
Eye on profitability
Although the Goldman analyst acknowledges the lackluster performance of 2020-21 shares
are partially down to economic factors, he also points out they were lacking in sales growth
when compared to other periods of high activity.
In the pandemic cohort, Kostin writes, sales growth was slower — the businesses posted an
average growth of 9% by their third year as a public company compared to 14% growth in the
2001 to 2019 period.
On top of that pandemic IPOs were also less profitable, he adds: “Just 52% of this class was
profitable by its third full year as a public company, well below the 71% of 2001-2019 IPOs
that turned a profit by year three.”
This is a further metric to keep an eye on, Kostin explains: “We expect profitability will be
especially important for upcoming IPOs. With capital markets closed for nearly two years,
unprofitable companies have been forced to fund operations by spending cash balances.
“This experience has driven investors to prefer stocks with high levels of current
profitability.”
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2/1/24, 5:14 PM IPOs: David Kostin of Goldman Sachs on how to spot if Arm and Instacart will be successful | Fortune

Home News Tech Finance Leadership Well Recommends Fortune 500

Goldman Sachs has found the secret to a successful IPO listing:

Metrics to look out for

ByteDance’s CEO is mad at his employees for missing the AI wave.

Weight-loss injectables like Zepbound are making as big of a

SUCCESS - REMOTE WORK

Remote work rebellion: SAP’s RTO push prompts 5,000

100 Best Companies Most Powerful Women

Fortune 500 Future 50

Global 500 World’s Most Admired Companies

Fortune 500 Europe See All Rankings

Leadership Europe Well

Success Environment Retail

Tech Fortune Crypto Lifestyle

Magazine CEO Initiative

Commentary Personal Finance

Frequently Asked Questions

Customer Service Portal

Single Issues for Purchase

Fortune Brand Studio

Behavioral Advertising Notice

Terms and Conditions

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