Newsmax Stock: A Cautionary Tale for IPO Investors? Initial public offerings (IPOs) often attract significant media attention and investor interest, representing the first opportunity for the public to purchase shares in a company. Consequently, share prices can fluctuate dramatically. Newsmax (NMAX -12.03%) experienced a turbulent IPO journey, concluding at the end of March. The company’s brief tenure as a public entity has been marked by considerable price volatility, offering valuable lessons and potentially serving as a warning for future high-flying IPOs. Initially, Newsmax raised $75 million by selling 7.5 million shares at $10, however, most investors were unable to acquire shares at this initial price. On its first day of trading, the stock price surged, closing at $83.51, followed by an even more dramatic increase on April Fool’s Day, with shares closing at $233. It’s crucial to recognize that short-term share price predictions are inherently unreliable. Investors who panicked and purchased shares at elevated levels have subsequently witnessed a substantial downward slide, culminating in a closing price of $16.19 on June 5th. A key takeaway is to avoid investing solely based on inflated prices; instead, a fundamental approach is paramount. Focusing on the underlying business and assessing long-term prospects is the most prudent strategy. Newsmax, a media company, derives the majority of its revenue – over three-quarters – from its broadcasting business, encompassing cable channels and a streaming service producing news and other content. Despite this revenue generation, Newsmax has consistently reported losses. In 2024, the company incurred a net loss of $72.2 million, following losses of $30.4 million and $41.8 million in 2022 and 2023 respectively. These losses occurred despite a significant increase in revenue, rising from $35.7 million to $171 million during this period. The company’s first-quarter results, released in May, revealed a $17.2 million loss, although this represents a narrowing compared to the $50.7 million loss from the previous year. While revenue growth is positive, sustained profitability remains the critical objective. When evaluating newly public companies, investors ideally seek operations generating profits. This is particularly relevant for Newsmax, given its competition with larger, established players. Conducting basic calculations provides further insight.
Currently, Newsmax has a market capitalization of $1.5 billion. However, during the peak of its rise, when the stock price reached $233, the market cap soared to approximately $21 billion. This figure, considered in isolation, might seem abstract. However, placing it within context can serve as a warning sign. The company’s inability to report a profit prevents the utilization of the price-to-earnings (P/E) ratio. Instead, investors can examine the price-to-sales (P/S) ratio. Newsmax’s 2024 sales totaled $171 million. Dividing the $21 billion market cap by this sales figure yields a P/S multiple of 122, calculated after its second day of trading. Although revenue grew by 26% in 2024, this valuation remains excessive. The current P/S ratio stands at 9, significantly higher than the benchmark Russell 2000 index, which typically exhibits a P/S ratio of 1 to 2. A compelling justification is needed for a stock to warrant a valuation substantially exceeding the index.
It’s easy to forget past experiences, but learning from them is essential for becoming a more informed and resilient investor. The next time you encounter a high-flying IPO, consider Newsmax and evaluate whether investors are engaging in short-term trading or making investments based on genuine long-term fundamentals. Remember, investing should be viewed as a marathon, not a sprint.
