E-Commerce IPOs Break Two Common IPO Patterns

  • Canadian e-commerce company Shopify soared 112% in a better-than-expected IPO.
  • The Chinese company Baozun gained only 1.7% in its disappointing market debut.
  • Each of these companies broke another common trend in newly IPOed stocks, highlighting the importance of investors’ independent analysis.
Shopify IPO Baozun IPO post IPO analysis

Two e-commerce services companies went public on May 21, Canadian firm Shopify (NYSE:SHOP) and Chinese company Baozun (NASDAQ:BZUN), and revealed interesting and unusual phenomena that investors can learn from. The two companies have entirely different business models: Shopify is a worldwide market leader of e-commerce services, which include online shop creation tools, payment processing services, and inventory and business management for online and brick-and-mortar stores. Baozun is focused on the Chinese market, where it enables international brands to penetrate the country and maintain successful e-commerce operations, which are entirely managed by Baozun in an outsourcing model.

Also see previous Shopify IPO analysis and Baozun IPO analysis.

The Shopify IPO enjoyed an enormous demand for shares, which allowed the company to increase its IPO price twice, from $13 (mid-point) to $15 (mid-point) and finally to $17. The opening price was 65% higher than the previous IPO price of $17 and 115% greater than the initial IPO mid-point price. As happened many times before with IPOs that soar high on their first day of trading, Shopify stock started to decline at the end of the first day to $25.7, which was 8% below the opening price but 51% above the formal IPO price of $17. Investors expected that the correction in Shopify’s stock price would continue in the following days until the company reached the initial IPO price. However, as shown in chart 1 below, the stock continued to surge for a few more days until it reached its all-time high of $29.7 before correcting to $27.2 (May 29 closing price). Small investors that purchased Shopify’s stock at the open market on the first day could have potentially gained 14% in only a few days.

BZUN_chart 3_053115

Baozun IPO was the exact opposite of Shopify IPO; the company suffered from little demand for its shares and had to lower the IPO price by 23% from a mid-point price of $13 to only $10. The Alibaba (BABA) backed company believed that the reduced IPO price would attract high demand for shares that could trigger a first-day surge in price. However, Baozun’s first trading day was disappointing as the opening price was set at $10.25 and the close price was only 1.8% higher than the opening price. After its disappointing market debut, it seemed Baozun would be going the same way as other disappointing IPOs - south – until it becomes cheap enough to buy. However, as shown in chart 1 above, Baozun's stock price increased to $12.78 in the days following the opening, which reflects a 25% gain for small investors who bought the stock on the open market.

These two IPOs break two typical patterns for recently IPO’ed stocks. The first is the usual pattern for heavily hyped, long awaited IPOs - stock prices soar on the first day and crash in the following days before returning to their IPO price levels. Two good examples of this phenomenon are Box (NYSE:BOX) and Etsy (NASDAQ:ETSY), which opened at a price higher by 44% and 112%, respectively, than their initial IPO prices, followed by a temporary increase before plunging and almost reaching their original IPO prices. Shopify has broken this trend at least for now. The second pattern occurs with companies operating in a growing market that the stock market considers “boring.” Their small appeal drives little demand for shares and a disappointing IPO, followed by an additional drop in stock price until it is low enough to justify a buy. Two examples of this phenomenon are digital advertising company MaxPoint (NYSE:MXPT) and cloud software vendor Workiva (NYSE:WK), which closed at 3.3% and 1.7% below the IPO opening price, respectively, followed by an additional 5.5% and 7.0% drop in price. Baozun broke this trend and traded at the end of May at $12.22, almost 20% higher than the opening price.

Conclusions

These two unusual examples of Baozun and Shopify show to small investors that they can still gain a short-term profit from IPOs regardless of the opinions of institutional investors who participate in the pre-opening pricing. Small investors should evaluate each IPO separately and disconnect themselves from media hype/buzz to correctly assess a company’s real value. Investors who feared a Shopify crash after an amazing IPO missed a one-week rally in stock price, as did investors who feared a Baozun crash after a disappointing IPO. Investors should use their entire set of tools, including my IPO analysis series here at Amigobulls, to prepare their investing strategy for every new company that goes public.

Disclosure: Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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