Aftermarket Performance and Example

What Is Aftermarket Performance?

Aftermarket performance is the variation in price level of a newly issued stock during a period after its initial public offering (IPO). No standard ending time period is considered, but aftermarket performance begins on the first day the IPO shares trade publicly.

By looking at the aftermarket performance of all IPOs over a certain period (as in a calendar year), analysts and investment bankers can estimate the overall market demand for new issues and may move up or delay a scheduled IPO as a result.

Understanding Aftermarket Performance

After an IPO, the price of the stock will fluctuate as investors buy and sell the shares. IPOs are typically highly volatile for the first several months of their existence. To company management, employees, and investors, the aftermarket performance of the stock is vital. If the company can reach and sustain a higher market valuation than the IPO price, equity funding may be more affordable than other methods of raising capital.

Investors should keep in mind that an IPO may only represent a small percentage of total shares outstanding, with the rest retained by the original investors and insiders. The remaining bulk of shares held by the firm can be used to raise capital down the road as the company looks to grow and enter new markets.

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. While aftermarket reports are not specifically mandated by a regulatory body, a company will generate and review them internally as a way of understanding the demand and liquidity of their newly issued shares.

There are no set parameters as far as what an aftermarket report should include. It will most likely include certain basic information, such as the exchange on which the stock trades, the ticker symbol, the bid and ask price at the close of the prior day's trading session, and historical information on previous trading sessions. Beyond that, an aftermarket report might also include a summary of analyst coverage, information on the stock's earnings, and company-specific or industry-specific news that might impact the stock's price going forward.

Special Considerations

When a well-known company goes public with a hot IPO, the share price can spike during the first day of trading, and then fall to earth rapidly. This can be the result of several factors including a large number of market orders at the open, followed by profit-taking by buyers who were able to have their trades filled before the volume of orders caused the run-up in price.

By the end of the first day, it is not unusual for an IPO to have traded in a wide range, ending close to or even below its initial price. In the days and months following the IPO, investors will digest how the IPO performed. Some IPOs move significantly higher in the first days and weeks, while others fall considerably in the first days and weeks of trading.

Investors will look to the IPO company's initial earnings releases to gauge how the company is doing and how it may perform in the future. This will then help them determine if they wish to buy, sell, hold, or short the stock.

Real-World Example of Aftermarket Performance

Peloton Interactive, Inc. (PTON) is a company that went public on Sept. 26, 2019, at an IPO price of $29. In the first few days of trading, the price fell. The stock remained well below $25 until Nov. 1 and hit a low of $20.46 on Oct. 23.

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The close price on Oct. 25 (Oct. 26 was a weekend) was $22.40, so the one-month aftermarket performance of the stock was -22.8% ((22.40 - 29) / 29). By mid-November, the stock had moved above the IPO price, and on Nov. 26 closed at $30.96. The two-month aftermarket performance was 6.8%. The price reached a closing high of $36.84 on Dec. 2, a gain of 27% from the IPO price. By late February 2020, the stock was back to trading around its IPO price, bringing aftermarket performance back to near 0%.

However, Peloton's somewhat lackluster aftermarket performance didn't foretell the stock's future performance. In its fiscal first-quarter 2021 earnings report, the company announced its 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 the increase 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.