Initial public offerings (IPOs) can get a lot of attention from the press and investors. This is the first time the public can buy shares in a company, and the share price can move up or down quickly.
Newsmax (NYSE: NMAX) completed its IPO at the end of March. In the company’s short life as a public company, the share price has been on a wild ride.
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It’s good to take a look at the events and glean lessons. Perhaps it can even serve as a cautionary tale for the next flashy IPO that captures people’s attention.
Image source: Getty Images.
Newmax’s IPO raised $75 million by selling 7.5 million shares at $10. However, most investors weren’t able to purchase shares at that price. On the stock’s first day of trading, the share price shot up to close at $83.51. The following day, April Fool’s Day, the shares closed at $233.
There’s no reliable way to predict short-term share price movements, however. Those who feared missing out and jumped in at these elevated prices have seen a massive downslide. The share price closed at $16.19 on June 5.
A key lesson is not to buy into a stock’s hype merely because the price has gone up a lot.
Granted, it’s not easy to ignore the hype and massive price movements. However, the best investing strategy is to look at the business and assess its long-term prospects.
A media company, Newsmax generated more than three-quarters of its revenue from its broadcasting business. This includes cable channels and a streaming service that produces news and other content.
Newsmax has a history of producing losses, however. Last year, the company lost $72.2 million compared to losses of $30.4 million and $41.8 million in 2022 and 2023, respectively. The wider losses came despite revenue increasing from $35.7 million to $171 million during this time.
The company reported first-quarter results in May that showed a $17.2 million loss. Granted, it’s heading in the right direction since that’s narrower than the $50.7 million loss a year ago.
While it’s positive to produce revenue gains, profitability is what counts. When looking at newly public companies, ideally, investors should see them operating in the black. That’s particularly true for Newsmax given it faces large and well-entrenched competitors.
Newsmax currently has a $1.5 billion market capitalization. However, when the stock price reached $233, its market cap was about $21 billion.
That might not mean much in isolation. But putting the figure into context could send a warning signal. Since the company doesn’t report a profit, investors can’t use the price-to-earnings (P/E) ratio. However, you can look at price-to-sales (P/S).
Newmax’s 2024 sales were $171 million in 2024. Dividing the $21 billion market cap by the sales figure equals a P/S multiple of 122 after its second day of trading. The company’s revenue grew by 26% in 2024, but that valuation still seems excessive. The shares currently trade at a P/S ratio of 9.
The Russell 2000 index, which encompasses small capitalization stocks, typically has a P/S ratio of about 1 to 2. There should be a compelling reason why a stock has a so much higher valuation than the benchmark index.
It’s natural to forget about unpleasant experiences. But you need to remember so you can learn and become better-educated investors.
The next time you hear about a high-flying IPO, think about Newsmax and whether people are making short-term trades or investing because they believe the company has strong long-term fundamentals.
After all, it’s wise to think about investing as a marathon rather than a sprint.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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