Amazon or Priceline: Which Is the Best Performer?

Here is an engaging way for your students to apply some basic math to the stock market.  In addition, this activity will teach them about IPOs, stock splits and two amazing growth stories:

  • If you had invested $1,000 in the Initial Public Offering (IPO) of Amazon and Priceline, which would be worth more?
    • Find IPO offering price through Google search:  Amazon’s IPO price was $18/share on 5/15/97; Priceline’s IPO price was $16/share on 4/30/99
      • Determine number of shares bought for each company at IPO price (note that each stock had a dramatic increase on their IPO date so unless you were one of the lucky few who received IPO shares, you would likely have paid more for your initial investment in the open market)
        • Amazon:  $1,000/$18 per share = 56 shares (rounded up) bought at IPO price
        • Priceline:  $1,000/$16 per share = 63 shares (rounded up) bought at IPO price
      • Research stock splits which will impact the number of shares you currently own:
        • Amazon stock split info:  2 for 1 (6/1998), 3 for 1 (1/1999), 2 for 1 (9/1999); so to determine the number of shares, multiply number of shares owned at IPO by split information, so 56 X 2 X 3 X 2 = 672 shares owned after these splits
        • Priceline stock split info:  No stock splits, so still own same 63 shares.
      • Find current price: Amazon @$325.98 on 12/1/14, Priceline @$1153.25
      • Multiply number of shares by current stock price:
        • Amazon: 672 shares X $325.98 = $219,059
        • Priceline:  63 shares X $1,153.25 = $72,625

So, if you were lucky enough to buy $1,000 of AMZN shares at the IPO price in 1997, your shares would be worth $219,059 or almost 220 times your initial investment (WOW!).  You wouldn’t be crying if you were lucky enough to buy Priceline at the IPO, as your $1,000 investment would be worth $72,625.

Before students make the link between IPOs and getting rich, they should read this Business Insider article, which includes these statistics on the poor long-term performance of IPOs:

Dr. Jay Ritter at the University of Florida regularly updates his research on this effect. In his most recent results (published in June 2011), the average three-year return of IPO stocks lagged the average three-year returns of similar non-IPO stocks by 7.2%.

How can we reconcile the apparent under-pricing when issued, with the huge initial run-up in price and then subsequent under-performance over three to five years? Dr. Ritter has concluded that these effects are simply a result of fads and irrational optimism on the part of investors.