Circle and Bullish Are Making IPO Stocks Hot Again. Wait to Buy Them.

Bullish signage during the company’s initial public offering on the floor of the New York Stock Exchange on Aug. 13. (Michael Nagle/Bloomberg)

Initial public offerings are the talk of Wall Street, largely thanks to red hot crypto properties. While more IPOs are on the way, investors who want to own stocks like these should be patient. If you miss the IPO pop, there’s almost always a chance to buy the dip.

It has been a big summer for IPOs, and the hottest of all have been cryptocurrency firms like Circle and Bullish . Circle Internet Group, issuer of the USDC stable coin, saw its shares leap nearly tenfold from $31 to $299 in the days after they began trading on June 5. Bullish, which hit the market Aug. 13 jumped $37 to a high of $118 on its first day.

Wall Street has still more crypto IPOs in the pipeline. Among the companies that have filed to go public with the Securities and Exchange Commission: Gemini, the crypto firm run by the Winklevoss twins, security firm BitGo, and Grayscale, which manages popular crypto exchange-traded funds.

When a stock doubles or even triples on the first day, it’s almost impossible not to have some investor FOMO. And it’s easy to understand why crypto fans are bullish. A friendly Trump administration has been removing regulatory roadblocks. Big banks, which long remained aloof, appear to be having a change of heart. And while no one doubts crypto remains speculative, companies coming to market have real businesses. Circle reported $658 million in second-quarter revenue on Aug. 12, up more than 50% from the previous year. While the company didn’t post a net profit, adjusted Ebitda, a common measure that excludes items like interest and taxes, was $126 million.

At the same time, it’s hard not to notice some screaming red flags. The stock market looks frothy. On Aug. 14, the S&P 500 hit its 18th record high of the year. And price-to-earnings ratios are higher than at almost any time since the dot-com bubble of the late 1990s. That era’s infamous IPOs—think Pets.com and Webvan—are an unavoidable historical parallel and a potential cautionary tale.

But even if you think these crypto firms are here to stay—that’s a big if—buying shares right after the IPO is rarely the best strategy. IPOs typically include just a small portion of a company’s overall shares— often less than 20%. Underwriters constrict supply to control the narrative—looking for the buzz-generating pop. In coming months or weeks, restrictions known as lockup periods, that keep pre-IPO shareholders like employees and early stage investors from selling, are lifted. The extra supply often causes prices to sink.

Shares of Circle have already seen some air leak out of their IPO bubble. On Friday, Circle stock traded at $150, that’s well above their IPO price, but about 50% below their all-time intraday high in late June.

Most IPOs eventually fizzle. In a 2021 study, Nasdaq researchers looked at the post IPO performance of all stocks that went public between 2010 and 2020. Just over half delivered market-beating returns on their first day; a year out only about a third were still outperformers.

The study did find a small number of IPOs turned into all-stars, delivering returns that beat the market many times over. After all, how would you feel if you missed the chance to get in early on a future Mag 7 member like Meta or Amazon?

Just take a look at how those two stocks, both of which hit the market since the advent of the Internet era, performed. Meta closed at $38 on the day of its 2012 IPO. Within a few months its price dropped as low as $18, giving investors with the patience to wait for a dip a far better entry point. Amazon closed at $23 on its first day in 1997, but quickly fell below $17 days later—another chance to buy the dip.

The upshot: If you really believe in Circle, Bullish or any of the other hot IPO properties, be patient. If these stocks do become the Mag 7 of tomorrow, chances are they will offer a better time to buy in than right now.

Write to Ian Salisbury at ian.salisbury@barrons.com