Amid IPO fever, advisors deliver reality check to clients

Scott Bishop of Presidio Wealth Partners says he knew some clients would be so eager to get in on AI giant Anthropic’s IPO, he didn’t even wait for them to inquire about it before sending a round of emails.

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“I let them know my thoughts before they asked, because I think it’s better than them asking and me replying and having it sound defensive or something,” said Bishop, who cofounded the Houston-based RIA in 2023.

Like many advisors, Bishop is skeptical that retail investors stand to benefit much from long-awaited and much-heralded initial public offerings from tech giants like Anthropic, SpaceX and OpenAI. In his emails to clients, he suggested it may be better to wait a bit before diving in.

Bishop said in an interview this week investors should ask themselves what they really want from an IPO.

“Are you buying this as a true investment?” Bishop said. “Or are you buying this for water cooler talk, for bragging rights on the golf course?”

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‘Who cares if you miss the first 10%?’

Anthropic, the maker of Claude AI systems, added to the anticipation for big IPOs this year when news broke Monday that it had filed confidentially with regulators to begin selling shares on public markets. This momentum builds alongside an IPO Tesla CEO Elon Musk’s SpaceX has planned for next week and ahead of widespread expectations that ChatGPT maker OpenAI will file for its own IPO later this year.

Bishop noted shares offered in IPOs tend to “pop.” Their prices rise quickly in the first day or so of trading but then fall just as quickly. Clients would usually be better off waiting a while before buying, he said.

More fundamentally, though, he questioned if most clients really view these now-hot companies as something to invest in for the long term. Bishop acknowledged that advising his clients to hold off for a while could cost them some initial gains.

“But if you’re buying this at a hypothetical $100 a share because you think it’s going to triple over a few years, who cares if you miss the first 10%?” he said.

Tim Thomas, chief investment officer at Badgley Phelps Wealth Managers in Seattle, said IPOs often reveal how professional wealth managers view investment opportunities differently from regular investors. Wealth managers tend to place less emphasis on what companies do or make and instead look at fundamentals like revenue, profit margins and prospects for growth.

Regular investors, meanwhile, sometimes want to put money into a company because they “like the vision,” Thomas said.

“Or they like the technology, and they think it’s going to be transformative,” he said. “They’re really making a bet more on a specific CEO, or a specific type of technology, or what have you, rather than the traditional way that, say, we would invest in a company.” 

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The pitfalls of firms that stay private for a long time

Anthropic, SpaceX and OpenAI are generating strong interest not only because they’re making their initial trips to public markets but also because of their pioneering positions in the cutting-edge fields of AI and space exploration. Their household names present investors with the tantalizing prospect of owning a slice of companies they know well but previusly couldn’t buy stock in.

Bryan Byrer, the founder of Millennial Financial Planning in Indianapolis, said the trouble with companies that remain private for so long before going public is that their values have most likely already been driven up by capital injections before their IPOs. That greatly reduces the chances that retail investors can really get in “on the ground floor” and buy a firm with a great deal of growth potential.

“It used to be that you needed public money to keep growing,” Byrer said. “That’s not the case anymore. Now, as companies stay private longer, they are being valued much more heavily. Some would say overvalued.”

Like many advisors, Byrer tries to discourage clients from buying shares in single companies and recommends they buy exchange traded funds (ETFs) and other index funds giving them investments in a large variety of shares. Byrer noted that recent changes adopted by many of the major stock indexes will mean many investors in broad-based market trackers will give them quick exposure to newly minted public firms.

S&P Dow Jones Indices, for instance, has proposed dropping its requirement that newcomers to public markets wait one year and show a profit before joining its benchmark S&P 500. Similar changes have been planned or adopted by Nasdaq and FTSE Russell’s series of U.S. indexes.

“With the fast-tracking of these stocks, they are going to get exposure,” Byrer said. “And if they’ve decided they don’t want an individual company like Meta or Amazon, why is this so special?”

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SEC seeks to ‘make IPOs great again’

The number of IPOs undertaken annually by U.S. companies has rebounded in recent years after hitting a record of 886 in 2021 and then bottoming out in 2023, according to numbers from the Securities and Exchange Commission. Interest rate hikes adopted to fight inflation raised the cost of the deals substantially, leading many companies to wait for more favorable economic conditions.

Last year, with interest rates on a downward trajectory, U.S. companies held 227 IPOs. That was up from 140 the year before.

SEC officials have proposed a number of regulatory changes to make it easier for companies to go public. Under his “Make IPOs Great Again” agenda, SEC Chairman Paul Atkins has called for a bevy of rule revisions aimed at helping companies bring their shares to market, in part by allowing more firms to be exempt from regulators’ extensive reporting requirements.

The revisions come in response to a decades-long drop in opportunities to invest in public markets. The SEC has said the number of publicly traded U.S. companies fell from 8,000 in 1996 to 3,700 in 2024.

The dearth of IPOs in recent years is only adding to the eagerness some investors feel to put money into companies many have known for years but been unable to access with their portfolios. 

Trevor Johnson, the founder of Dream Weaver Financial Planning in Richmond, Illinois, said he’s careful never to reject an investing idea outright. If a client wants to do something risky — like putting money into a hyped IPO — he’ll usually recommend they use only a small part of their portfolio for that purpose. He’ll also suggest they consider trickling their money in, which can help limit losses if the stock’s value should plummet.

“Rather than making a large bet all at once, it can make sense to start with a small position and reserve capital to add more over time if valuations become more attractive,” Johnson said. “Meanwhile, the other 95% to 99% of the portfolio remains invested in a diversified strategy designed to compound wealth over the long term.”

Bishop said he has little doubt that many investors want to own shares of SpaceX, Anthropic or OpenAI merely so they can say they’re taking part in the latest big investing trend. There’s nothing necessarily wrong with that, he said, as long as clients aren’t taking on too large a position.

“But then it risks becoming what I call portfolio noise,” Bishop said. “How many stocks do you want to have to track if you want to sell something, if you need to rebalance, or if you want to do tax-loss harvesting? How many positions do you want to look at? Is this really an investment, or is this just something you want to be able to tell people you have?”