No, Twitter, the stock market isn’t crashing 🙈

by Investing Reimagined

The educational portion of this newsletter focuses on IPOs and DPOs

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Tech stocks to all of our portfolios right now

In this newsletter:

  • 5 headlines that sum up the week
  • Why people think that the stock market is crashing
  • A crash course on IPOs and DPOs
  • Our rec of the week

This happened...

Five headlines that sum up the week 🚀 📈

1. Paramount Pictures launched its streaming service Paramount+

Nothing could possibly prepare 90s babies for a CG-animated Rugrats

Are there too many streaming platforms, or is cable TV becoming a thing of the past? As of yesterday, Paramount+ is now available for $5.99 a month. Technically, it’s always been with us as it is actually a rebrand of CBS All Access. However, in addition to the live sports and news normally found on CBS, viewers also have access to popular titles found on Viacom-owned networks like Nickelodeon, Comedy Central, MTV, BET and The Smithsonian Channel. The most exciting part about Paramount+ is easily the upcoming reboots and spinoffs of beloved shows, such as Frasier, Rugrats and iCarly.

2. Jerome Powell said some stuff and the stock market responded aggressively

Despite the general consensus among investors, Federal Reserve Chairman Jerome Powell doesn’t seem phased by the notion of inflation. In yesterday’s announcement, he instead acknowledged that while economic recovery could lead to rising inflation, it would only be temporary. The most important thing is raising employment, which has always been the primary focus since the pandemic struck. As a result, there will be no policy changes. This move might work out, but it’s a race against time. The labor market ideally needs to hit its target before inflation reaches 2%. This wasn’t welcome news to the bond market, which sold off aggressively on Thursday. Stocks were quick to follow.

3. Chipotle and E.L.F. Cosmetics win our superlative for most random partnership

The guac green in this burrito-inspired palette pays homage to the eye shadow game millennials flexed in the 2000s

Have you ever loved a burrito so much you wanted to wear it on your face? Boy do we have a makeup line for you. Launching March 10, E.L.F.’s limited edition joint makeup line will be available. The eye shadow palette, which is $16, consists of 12 colors that were “inspired by classic Chipotle ingredients, including white rice, brown rice, pinto beans, black beans, sofritas, fajitas, mild salsa, green salsa, hot salsa, corn salsa, guac, and lettuce.” They even offer a makeup sponge that’s the shape of a tortilla. Read More.

4. Amazon wants to buy Thursday Night Football

If this billion dollar deal goes through, all Thursday NFL games will be broadcasted exclusively on Amazon Prime. Thursday isn’t the only night up for grabs. The football league is also in negotiations with several major networks for Sunday and Monday, too. At this time, Fox Sports has rights to Thursday games – although not exclusively – and is paying around $660 million. It might seem random for Amazon to be going after NFL games, but breaking into sports has been part of its strategy. Currently, Amazon pays the NFL $75 million per season for streaming rights of Thursday games.

5. Google is going to stop tracking individuals across websites for ad targeting

Consumers want more privacy and many tech giants are ready to give it to them. The most recent to make this move is Google, which will no longer sell browsing data to advertisers for the purpose of targeting. This isn’t totally new news. Google already said that it would start phasing out 3rd party cookies from Chrome altogether by next year. This recent announcement makes it clear that the company will not seek an alternative tracking technology to accomplish what 3rd party cookies were doing.

ICYMI: The stock market is going through a rotation – not a crash

On Thursday, #StockMarketCrash was trending on Twitter. This claim is false. The sharp drop we saw across the entire stock market last March is a crash. This is what the it looks like compared to yesterday.

What a stock market crash really looks like (source: a Twitter user who included a caption we cannot post)

If your portfolio consists of only technology stocks, you’d probably agree that the stock market is indeed crashing. However (and we cannot emphasize this enough), if your portfolio is mostly large-cap tech, your portfolio is overexposed. 

The result of being overexposed to a specific sector could be damaging if there is a rotation, which is what has been happening here. So, to be clear, the stock market is not crashing. In fact, we’re not even close to a bear market, which is when you see a drop of 20% from a recent peak.

If this is the case, then why are some people convinced that the stock market is crashing? Yesterday, the Nasdaq entered correction territory, which means the index dropped 10% from its recent peak. We say this a lot, but the Nasdaq is very tech heavy – about half of the entire index is tech. Around 25% of the S&P 500 is tech and less than 20% for the Dow.

At this time, the Dow and S&P are nowhere near correction territory. And in the grand scheme of things, 10% is peanuts compared to the 34% drop the S&P 500 saw between February 19 and March 23 last year. Read More

Today I learned...

How to get on the stock market

Spotify went public in 2018 via direct listing

TL;DR

  • An IPO – initial public offering – is the process whereby a private corporation “goes public” by offering stock to public investors
  • IPOs offer private companies a chance to raise new capital, while public investors have an opportunity to jump aboard the train at the first station
  • A DPO – direct public offering – lets companies skip intermediaries, bypass restrictions from banks and venture capitalists, and offer securities directly to the public
  • DPOs provide private investors a chance to sell their shares in the broader market, while companies can still benefit from such crowdfunding efforts

Any corporation available on an exchange is a public company, which broadly means that the general public can trade their stock. On the other hand, private companies are held by insiders – founders, employees, family and friends, and early investors. 

How does a company go about becoming public and listing on an exchange? The answer is with a public offering.

 What is an IPO?

A initial public offering (IPO), is a process that allows a private company to offer stock to the public at large. Before their IPO, a company is still considered private. As a private entity, companies often focus on defining their mission, building name recognition, and growing their customer base.

But when a company reaches the stage where founders believe it can adhere to SEC regulations, as well as the expectations of and legal obligations to public shareholders, it can file its intentions to go public.

The IPO Process

While there are tons of nuances to navigate, there are five major milestones that every hopeful entity must hit for a successful IPO.

1. Underwriting the Offering

Underwriting typically occurs six or more months before the IPO itself.

  • This kicks off after the issuing company announces its intention to go public
  • Banks and other institutions can submit bids to handle the proceedings. 
  • Typically, the issuing entity looks for a bank that will drum up the most business, as it’s the bank’s responsibility to gather initial buyers

Once the company selects a bank, the two institutions enter an agreement that outlines important details, such as:

  • How much money will be raised
  • The type(s) of securities issued
  • Underwriting fees

2. Regulatory Filings
This process occurs at least three months before the IPO.

  • During this time, an IPO team consisting of the lead investment banker, lawyers, accountants, and SEC experts to hash out the details of the IPO
  • Once the appropriate arrangements have been made, the IPO team files an S-1 registration statement with the SEC detailing information about the company and upcoming offering

3. Approval and Pricing 

If the SEC approves, the next step for the IPO team is to set a date and price the new company. 

  • Investors can submit bids for how many shares they want to buy. They won’t learn how many shares they can buy until the day before the IPO.
  • Based on investor interest, the underwrite will determine the IPO price
  • The new Board of Directors will meet to review an audit of the company and file with its intended stock exchange(s) to list its IPO

4. Stabilization
This step occurs immediately after the IPO.

  • In the days following initial trading, the underwriter will ensure a continuing market for the stock
  • The goal is to keep interest high enough that the stock doesn’t fluctuate too much
  • This “quiet period” only lasts for 25 days

5. Transition

The underwriter is then tasked with providing estimates about earnings, which helps investors “transition” to relying on mandated public information about the company.

Benefits of IPOs

  • Provides a chance to raise capital quickly
  • Gives a company room to expand, invest in infrastructure, or hire new employees
  • Companies are more attractive to lenders due to increased transparency from the SEC
  • Employees have an opportunity to hop off the train early, while new investors can jump on
  • Investors who get in at the first stop have the potential to earn big as shares skyrocket in the early hours

Downsides of IPOs

  • Expensive – 3-7% of a total IPO can total hundreds of millions of dollars
  • Higher potential of price volatility early on
  • Current owners may not be able to take shares for themselves (even if they do, the lockout period prevents them from selling shares within six months)
  • Not designed for long-term performance – they’re priced at a premium so founding members can cash in on their hard work

What is a DPO?

Also known as a direct public offering or direct placement, this is where a company offers existing securities directly to the public. As a result of this decision, the company is responsible for setting their terms and tailoring the process to its best interests.

Typically, companies that offer DPOs are not seeking to procure the same level of capital investment as those who offer an IPO. One common reason to issue a DPO is to allow invested employees the chance to trade their shares to an outside market, thereby providing them with liquidity.

DPOs are often attractive to smaller organizations that want to go public without paying millions to an underwriter. They can also bypass restrictions imposed by banks, capitalists, and other financiers. 

The DPO Process

Preparing a DPO can take weeks to months, depending on the organization. 

  • The company can decide what types of investments it wants to offer, then issue a memorandum detailing the issuer’s background and potential offerings.
  • It’s up to the company to decide how to market their securities

Before officially offering shares, the company must also file compliance documents according to relevant Blue Sky Laws in any state wherein it intends to offer a DPO.

  • These documents outline financial data, memorandums, and other official paperwork
  • Most companies that issue a DPO do not need to register with the SEC if they qualify for federal security exemptions

Upon receiving regulatory approval, the company can officially announce its direct listing. And instead of issuing new stock, the company’s owners and investors convert their ownership into shares of stock or other assets.

Instead of an IPOs

Benefits of DPOs

  • A great way for companies to avoid share dilution, lockout periods, and focusing on institutional investors rather than their community
  • Provide employees, family and friends, and company founders with the chance to sell their shares to the outside world
  • Provides both the company and its employees with greater liquidity

Downsides of DPOs

  • Riskier
  • No underwriter to bolster share prices by purchasing leftover stock, which can lead to cancelled offerings
  • Companies may also struggle to generate enough interest without access to a built-in pool of promoters and institutional investors
  • Won’t have a greenshoe clause to sell more shares than planned in the event of higher-than-expected turnout

The bottom line

If you’re thinking about buying shares of a company that’s about to go public, you want to make sure that the business is foundationally and fundamentally strong. Otherwise, you’re setting yourself up for future disappointments – not to mention losses.

We only scratched the surface with IPOs and DPOs. For a more in-depth deep dive, check out our educational post about this topic. Moving forward, we will link resources like this at the end of our Today I learned… for all who wish to learn more. 🤓

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