What Is Aftermarket Performance?
Aftermarket performance begins on the first day that initial public offering (IPO) shares trade publicly. The aftermarket performance is the variation in the price level of a newly issued stock during a period after its IPO.
Analysts and investment bankers estimate the overall demand for new issues and may move up or delay a scheduled IPO by looking at the aftermarket performance of all IPOs over a given period.
Key Takeaways
- Aftermarket performance is how a stock performs after its initial public offering (IPO).
- IPO stocks are typically highly volatile in their first months of trading.
- The IPO price, market sentiment, and initial earnings contribute to aftermarket performance.
- An aftermarket report summarizes the stock's price over previous trading sessions, initial earnings after the IPO, and company-specific news.
IPO and Aftermarket Performance
After an IPO, the stock's price fluctuates as investors buy and sell. IPOs can be highly volatile, and for company management, employees, and investors, the aftermarket performance of the stock is significant. If the company sustains a higher market valuation than the IPO price, equity funding may be more reliable than other sources of capital.
An IPO may only represent a small percentage of the total shares outstanding, with the rest retained by the original investors and insiders. The firm's remaining shares can be used to raise capital as the company grows and enters new markets.
In 2021, the average first-day gain after an IPO was 16%. For all common stock IPOs between 2000-2020, the average first-day IPO return was 21.11%.
Aftermarket Report
An aftermarket report summarizes the aftermarket performance of a stock, often listing key metrics that help analysts and investors evaluate the stock during its first days and months of trading. Aftermarket reports are not mandated by a regulatory body but are generated and reviewed by companies to understand the demand and liquidity of newly issued shares. The report may include:
- Exchange on which the stock trades
- Ticker symbol
- Bid and ask price at the close of the prior day's trading session
- Historical information on previous trading sessions.
- Summary of analyst coverage
- Information on the stock's earnings
- Company-specific or industry-specific news
Example of Aftermarket Performance
Peloton Interactive, Inc. (PTON) went public on Sept. 26, 2019, at an IPO price of $29. In the first days of trading, the price fell and remained below $25 until Nov. 1, hitting a low of $20.46 on Oct. 23.
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- The close price on Oct. 25 was $22.40. The one-month aftermarket performance of the stock was -22.8% ((22.40 - 29) / 29).
- On Nov. 26, the stock closed at $30.96. The two-month aftermarket performance was 6.8%.
- In February 2020, the stock traded near its IPO price, bringing aftermarket performance to near 0%.
Peloton's lackluster aftermarket performance didn't foretell the stock's future performance. In its first-quarter 2021 earnings report, the company announced total revenue grew 232% to $757.9 million, spurred by a 137% increase in connected fitness subscriptions and a 382% increase in digital subscriptions.
The company cited growth in consumer demand for its at-home fitness products and services during the global crisis as the reason for its surge in earnings. The stock closed at $150.14 on Jan. 19, 2021, up 418% from its IPO price.
What Is Profit-Taking?
During a hot IPO, the share price can spike during the first trading day and fall rapidly. This is due to several factors, including a large number of market orders at the open, followed by profit-taking by buyers who have their trades filled early and then profit from the run-up in price.
What Is a First-Day Return?
For an IPO, first-day returns are the percentage change from the offer price to the closing price.
What Does an IPO's Initial Earnings Release Tell Investors?
Investors will look to the IPO company's initial earnings releases to gauge how the company may perform. This will help them determine if they wish to buy, sell, hold, or short the stock.
The Bottom Line
Aftermarket performance is the movement of a stock's price after its initial public offering (IPO). The IPO price, market sentiment, and initial earnings contribute to a stock's aftermarket performance. Companies create aftermarket reports to summarize the stock's price over trading sessions, earnings after the IPO, and company or industry news.
