By Thomas Meinke, investment director and vice president of Dimensional Fund Advisors
When a new stock is listed on the market, it can cause great excitement. Recently, SpaceX grabbed the headlines when it became the largest-ever IPO with an initial valuation of $1.8trn, which represented 2.4% of the total market capitalisation in the US. The previous record was Facebook in 2012, which represented just 0.6%, a quarter of the size of SpaceX.
IPOs are an important part of equity markets and a dynamic economy and, for many people, the idea of getting in early with these types of businesses is appealing. Investors might look at the dominant technology companies of the past decade or more, the so-called magnificent seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), and wonder whether SpaceX and other potential future technology IPOs, such as Anthropic and OpenAI, will follow.
‘Whether’ or ‘when’ to invest?
So, should you invest? When people ask us this question, we usually say: “Yes, because broader diversification is a good idea, and buying many companies improves your chances of owning the winners of the future.” But the more useful question is not “should I invest?”; it is “when should I invest?”.
To answer that question, we compared the performance of over 600 IPOs in the US between 2016 and 2025 to the return of the Russell 3000, the most common total market index for US stocks.
Following their addition to the index, the average monthly IPO USD return was −0.75% until their one-year IPO anniversary, while the average monthly index return was almost 1% over the same time period. This wide divergence suggests that new IPOs frequently fail to live up to the hype of their listing.
This is not surprising. Most IPOs are unprofitable companies whose shares are expensive relative to their book value. In fact, 60% of US IPOs between 2005 and 2024 had negative earnings at the time of going public, and the average IPO was more than twice as expensive as the broad market. This combination of characteristics is usually bad news for investors, because companies with high prices relative to fundamentals and low profitability usually underperform.
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Large IPOs such as SpaceX also suffer from a turbulent track record. Three-quarters of the largest US IPOs in the past 20 years, including names like Facebook, Visa, Uber, Airbnb and Hilton Worldwide, underperformed the market in their first 12 months. The median underperformance among this group was 33%.
Being generally expensive and unprofitable companies is a contributor to the poor performance of IPOs, as decades of academic research has shown. The availability of shares seems also to play a part.
Shares listed in the US have an average “free float” of 96%, meaning that almost all shares of a company are available to trade on the market. In comparison, the average free float of US IPOs between 2005 and 2024 was 34% one month after listing. SpaceX’s current free float is less than 5%.
Often, free float is smaller for IPOs because a large percentage of the shares are held by insiders. These private shareholders are subject to lockup provisions that prevent them from selling shares on the open market. When the lockup agreements expire, usually 6-to-12 months after the initial offering, these shares may be sold in the marketplace, creating a liquidation event that puts downward pressure on the stock price.
Do the right thing
The long-term evidence suggests that, for various reasons, investors should expect a lower return than the market from IPOs for a while after their listing. How long depends on a number of factors, including the pace at which additional free float becomes available and the company’s evolving valuation and fundamentals.
Knowing all this, we think IPOs should be evaluated carefully — only own them if they fit your investment strategy. If you track an index, you have already deferred your decision to the company that publishes your index, which may use fast-track methods to add large IPOs to their indices in the first few weeks. If you are a stockpicker, you might want to own them if you think they are more undervalued than the stocks you already own.
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Our preference is to apply a scientific method to investing. That means gaining insight into markets from academic research and applying that insight in a systematic way to improve returns.
In the context of IPOs, this means we generally do not buy them in our broadly diversified equity strategies for up to one year. This allows postoffering activities that may impact the price discovery process, such as pricing support by the institutions underwriting the IPO and shareholder lockup agreements, to expire.
Once these hurdles clear, the path opens for IPOs to enter our equity strategies.
