Hat tip to Morning Brew for highlighting this chart in their daily newsletter. 

With a flood of IPOs about to hit the market (Pinterest, Uber and AirBNB to name a few), I thought this chart was an important reminder that not every tech IPO goes BOOM! 

Questions:

• Why do you think that companies like GoPro and Fitbit have struggled so much as public companies? (Hint: are there other products similar to theirs?)
• Square is a top performer. Do you know what business they are in? Do 5 minutes of research to figure out why their stock has performed so well?
• Would you be interested in buying shares in an upcoming IPO because you are familiar with the companies (like Uber, Pinterest, AirBNB)? How would you decide if it is a good investment? 

Pro tip: Investors often choose stocks based on their affinity for the brand. "I really love to wear Nike shoes and therefore I think it will be a good stock" is not necessarily a winning strategy for investing. Why? Well, it leaves out one key factor, which is how is the stock currently valued by the market. A very popular stock may already have this popularity priced in. Popularity is measured by something called a P/E ratio or price to earnings ratio. It basically tells you how much are investors willing to pay for a $1.00 of a company's earnings. Take Wal-Mart and Amazon as an example. Investors value the same $1.00 of each company's earnings VERY differently. 

Currently, Wal-Mart's popularity is such that investors are valuing the company so they are willing to pay about $20 for every $1 of Wal-Mart's earnings. As for Amazon, investors are willing to pay about $90 for every $1.00 of Amazon's earnings. So Amazon is much more popular. Why? Well, it's growing faster, it has a cloud business that is extremely profitable, it is expanding into new businesses every day it seems and many would argue it has a better business model than Wal-Mart since it doesn't have all those physical store locations which are not as productive. Given it's extreme popularity (measured by a P/E of 90), Amazon must continue to satisfy investor's appetite for growth. If they don't, well watch out below....

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Play our latest FinCap Friday, Is I.P.O. The Way to Go?,  to give your students a deeper understanding of the challenges of investing in I.P.O.s. 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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