Chris’ note: Today, we’re shining the spotlight on Jeff Brown. He’s our tech investing expert here at Legacy Research. And Wednesday, at 8 p.m. ET, he’s lifting the lid on a moneymaking idea that needs to be on your radar: something he calls “Penny IPOs.”
They’re an alternative way to play the booming IPO (initial public offering) market. These explosive early-stage stocks go public almost every week. And almost nobody in the mainstream knows about them.
But if Jeff is right, Penny IPOs could be one of the last bastions of serious wealth creation in America… and could put you on the path to a seven-figure portfolio.
The best part is… you don’t need to be an accredited investor to get involved. So make sure you’re signed up for Jeff’s big event for all the details. Then read on for more on why he’s so excited about the opportunity in Penny IPOs.
Chris: You’re an early-stage investor in tech startups. And you’ve made millions investing in more than 195 early-stage deals, including cryptocurrency exchange Coinbase (COIN). What is it about getting in early that gives you such a high potential return?
Jeff: I invested in my first private tech company more than 20 years ago. So I’ve had two decades of experience with this kind of investing. The key is getting in early at low valuations… then watching the companies grow.
A lot of companies I invest in have valuations of less than $10 million. That gives me huge potential upside. When a company you invest in at less than $10 million grows to $1 billion, that’s a 9,900% return.
Chris: Not every early-stage investment works out. What are some of the pitfalls you’ve come across?
Jeff: As an early-stage tech investor, it’s critical you stay rational about valuations… and avoid hyped IPOs. Remember, it’s not what you buy that really matters, but what price you buy it at.
Take last September’s IPO of cloud-based data warehouse company Snowflake (SNOW). It was the biggest software IPO ever.
It’s easy to see why… The size of that market is more than $250 billion. And Snowflake has great tech. I’ve been following it for years. In fact, I worked with one of the company’s CEOs when I was an executive at Juniper Networks (JNPR).
So I knew the company well. I was excited to see it go public. But that doesn’t mean I was a buyer.
Its shares were originally priced to sell for $80 at its IPO. But there was so much demand, they rose to $125 a share. And when the shares became available on the public market on IPO day, regular investors couldn’t get in for less than $245 a share.
No retail investors were able to invest in that company anywhere between $80 and $245.
At $245 a share, investors were paying 177 times annual sales. That means it would have taken 177 years of sales at the time to reach the valuation SNOW traded at straight out of the gate.
To put that in context, let’s say another high-quality software company… with high growth… and fantastic gross margins… fetches 20 times annual sales.
To give you a 20-year payback, that company would have to pay you 100% of its sales revenues for 20 straight years in dividends. And it can’t do that because it still needs to pay its employees’ wages… cover other costs… and deal with tax liabilities.
So 20 times is already quite high. Anyone investing at 177 times sales will lose an absolute fortune.
Chris: Is this a one-off occurrence or part of a wider trend?
Jeff: It’s absolutely part of a wider trend.
It used to be much easier to get in at attractive valuations. Take Amazon.com (AMZN). It went public on May 15, 1997. At the time, it had a valuation of $476 million.
Since then, its shares are up 367,967%. That would have turned a $1,000 investment into nearly $3.7 million.
Sadly, the opportunity to invest early so successfully has almost disappeared. Today, many tech companies are staying private far beyond becoming worth more than $10 billion.
There’s so much funding available from venture capitalists (VCs), companies don’t need to go public to raise more capital. They can continue to access capital in private markets.
Chris: Why is staying private preferable once these companies know they can access as much capital as they need?
Jeff: The moment a company goes public, managing it is different. A public company must maintain compliance with regular Securities and Exchange Commission (SEC) filings. This is a significant burden in terms of time and expense.
Equally important is the distraction of managing Wall Street’s expectations on quarterly earnings calls. Tech companies typically pursue big ideas that majorly disrupt legacy industries. The last thing their management teams want to worry about is short-term quarterly earnings performance.
So they stay private for as long as they can. That means VCs and private equity investors are capturing almost all the potential investment gains. Normal investors get the scraps.
Chris: You spent more than five years developing your “Penny IPO” system as a smarter alternative.
How is it different from what we’ve been discussing… where folks pile into these stocks on IPO day, regardless of price, just because the financial press and folks on social media are hyping them up?
Jeff: I’m always looking for ways to stack the deck in favor of my subscribers. I want them to be able to invest at terms that are even better than where typical VCs get in. It’s a personal mission of mine.
I refer to the opportunity I’ve found here as “Penny IPOs.” Unlike the overpriced and overhyped IPOs you hear about on CNBC, these companies are still at the earliest stages of their development. That means they have much higher return potential.
And they can become available at valuations 100 to 300 times cheaper than overhyped IPO stocks such as Snowflake.
For example, one Penny IPO trade I recommended after launching my Early Stage Trader advisory was Synthorx (THOR).
It’s a tiny company that’s focused on prolonging and improving the lives of folks with cancer and autoimmune diseases. After I recommended it, its shares jumped 432% in just 41 days, with the bulk of that gain coming in a single day.
Chris: That’s a phenomenal return over such a short time.
Jeff: That’s the power of Penny IPOs. They’re one way to play the ongoing IPO boom that gives you a chance to invest at even better valuations than the VCs do.
I won’t get into too much detail here. But if your readers are interested in learning more about this strategy, I invite them to join me at my upcoming event, Silicon Valley “Unlocked.”
You see, I’ve recently returned to Silicon Valley to investigate the top Penny IPOs out there. And I’ve been crafting a list, which I’ll unveil at my event on Wednesday.
It kicks off at 8 p.m. ET. It’s free to attend. So I hope to see many Daily Cut readers sign up and join me.