Don’t Buy Shopify Inc. Until November 17th

Because of the IPO lock-up period, investors should wait until everyone starts dumping their shares on that day, and then start buying Shopify Inc. (TSX:SH)(NYSE:SHOP).

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The initial public offering (IPO) is, in my opinion, one of the easiest ways for institutional investors to make a significant amount of money right as the stock launches. If the IPO does well, there will be a pop the minute the stock goes public, and those that are holding the stock will instantly double or triple their money in the blink of an eye.

The problem is that the IPO is catered to make institutional investors money. The average investor like you and me won’t really be able to make money on the IPO because we are buying the shares at the top of that pop, not at the original IPO price. For example, an underwriter, the bank that helps the company actually go public, might get the shares at $15, but when it pops, they may jump to $25. Therefore, I like to avoid IPO stocks because they are almost always volatile, and that gives me a little heart burn.

Shopify Inc. (TSX:SH)(NYSE:SHOP) went public on May 21st and was valued at US$1.27 billion. Shopify is an e-commerce play. What its platform does is allows for other merchants to create great online shops. Rather than hire an expensive developer to make something custom for you, Shopify enables you to launch in days—not weeks—with a fully functional, branded e-commerce site. And it’s only for $79 a month.

The company makes, on average, about $600 in gross profit per year from each of its merchants. What has some investors concerned is that it costs approximately $1,000 in sales/marketing to sign up a new merchant. That means it takes over a year to breakeven on the cost of acquiring a new merchant, so Shopify has to hope that the merchants stay profitable for at least that long. The good thing is that the company is adding new subscribers, though, so it is going to continue growing.

Don’t buy until November 17th

I’m not a trader. I like to buy stock and hold it, knowing full well that in a few years, it’ll be worth much more. And I don’t think you should even consider trading Shopify. However, November 17th is a key date for those that are looking to buy shares of Shopify at the best price.

On November 17th the lock-up period ends. What this means is that people that didn’t sell their shares in the IPO are then allowed to sell their shares. The reason banks set a lock-up period is to prevent the market from being flooded with too many shares.

When you have hundreds of employees that have been waiting years for their chance to liquidate, you can imagine that November 17th is going to see a huge dumping of shares. That should send the price of Shopify down significantly.

Therefore, you should wait until this lock-up period ends to start buying shares of what should be one of Canada’s greatest growth stocks. This is a lesson you should take for every IPO: if you can’t get the original IPO price, wait for the lock-up period and buy then. You’ll get a better price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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