U.S. IPOs See 140% First-Day Surges, But Long-Term Gains Uncertain

Newly listed companies in the United States are experiencing unprecedented first-day stock price surges, with some stocks doubling in value at a pace not seen since 2021. This trend has invigorated the IPO market, capturing the attention of traders and investors alike.

Airo Group Holdings Inc., a drone manufacturer, saw its stock price soar by 140% on its first trading day. Just a week prior, Circle Internet Group Inc., a stablecoin issuer, completed a 1.2 billion IPO and witnessed its stock price jump by 168.5%. These dramatic first-day performances have been a rare occurrence since 2021, when nine companies achieved similar feats.

Historically, extreme first-day surges have not translated into long-term returns for investors. Professional traders and retail investors often drive these initial gains, buying early to capitalize on market momentum. However, these buyers typically do not secure IPO allocations, as companies prefer to distribute shares to mutual funds that commit to long-term support based on fundamental analysis.

The rapid first-day gains are often driven by momentum and retail buying, making them unreliable indicators of a company's long-term prospects. Data compiled by Jay Ritter, a finance professor at the University of Florida, shows that between 1980 and 2023, 316 companies had their stocks double on the first trading day. Of these, nearly 90% underperformed over a three-year holding period, with an average loss of 46% relative to the first-day closing price.

Ritter notes that first-day doubles often occur during market peaks, such as the dot-com bubble of 1999-2000, when over 100 companies saw their stocks double. However, many of these companies eventually faded into obscurity. Recent examples like Newsmax, a conservative cable news channel, illustrate this pattern, as the company's stock price surged 735% on its first trading day after a 75 million IPO in March.

Despite the initial excitement, many companies that experience significant first-day gains later face financial challenges. Vroom Inc., an online used car retailer, saw its stock price surge by 118% on its IPO day in 2020 but filed for bankruptcy protection in 2021. Even industry giants like Airbnb Inc. and Snowflake Inc., which doubled on their IPO days in 2021, have since seen their stock prices dip below their first-day closing prices.

For Airo Group Holdings, the timing of its IPO was crucial. The company went public amid an executive order by Donald Trump to boost domestic drone manufacturing and heightened geopolitical tensions that underscored the value of advanced drone technology. Airo's executive chairman and co-founder, Chilingirive Katuria, expressed surprise at the stock's dramatic rise, attributing it to the company's vision and the support of long-term investors.

Following a period of extreme volatility in April that temporarily halted IPO activity, the market has seen a resurgence in investor interest. Companies are seizing the opportunity to go public before the window of opportunity closes. However, the sustainability of high initial returns in the U.S. IPO market remains uncertain, especially given ongoing trade tensions and geopolitical conflicts.

In the past month, several companies that experienced significant first-day gains have seen their stock prices decline from their initial highs. Newsmax's stock price, for example, is now only 24.2% higher than its IPO price. Omada Health Inc., a digital health company, saw its stock price rise by 21.1% on its first trading day but has since fallen 10% below its IPO price. Similarly, MNTN Inc., an advertising technology company, experienced a 64.8% first-day gain but has since risen only 15.7% from its IPO price.