IPOs arouse the desire for quick riches
Despite this obvious discrepancy in the available information, investors who are very willing to take risks are already grabbing the newly issued shares on the day of the IPO. For this particular type of investor, few scenarios sound more satisfying than the idea of potentially getting a stake in the next Facebook, Amazon, or Apple. This desire for quick riches ensures that an IPO is always given special attention.
How does an effective IPO analysis work?
You should not invest just because an acquaintance advises you to subscribe to the share or the CEO of the company about to issue a friendly interview. As before any other investment, it is the investor’s duty to research useful information about the company, especially in the case of an IPO. Because a look at the annual report, the annual financial statements and the prospectus can noticeably reduce the risk of a possible bad investment.
Proper research is a must!
However, anyone who considers this fundamental approach to be unnecessary and still invests is more of a speculator than an investor. Of course, there is a certain problem in that the companies that go public for the first time usually do not have a long history of disclosing financial statements. However, the Federal Gazette provides a remedy for companies based in Germany. All official publications of stock corporations, partnerships limited by stocks or limited liability companies can be viewed from the electronic database of the official organ of disposal of the federal government.
The IPO valuation depends on the mood of the market
As with any commercial business, the price per share of an IPO depends on market demand. Consequently, strong demand for the company’s shares leads to a higher share price. How strong the demand can be for an IPO always depends on the general condition of the overall market. It is quite possible that two identical companies achieve very different IPO valuations due to the mood of the market. At the height of the tech bubble around 2000, various dot-com companies achieved IPO ratings that defied any mercantile reason, simply because the Internet hype at the time created high demand for such companies.
Peer group provides a clue
Before an IPO, investors should also take a look at the company’s peer group. A reasonable industry comparison can make an IPO valuation much easier, since important valuation multiples can be used as comparison values. This assumes that investors are willing to pay a similar premium for the new company in the industry as they do for an existing company. In addition to the industry comparison, the company’s individual growth forecasts also play an important role in assessing the stock market value. Especially in young, dynamic companies, a significant part of the added value is created through growth, diffusion and expansion.
The main motive for an IPO should be to raise more capital to finance further growth. Thus, the IPO rating is also closely related to the plans and forecasts of the company’s future expansion strategy.
Investors appreciate a good story behind the company
Of course, the quantitative factors, which can be determined through a fundamental company analysis, play an important role in the assessment of a share and its IPO. However, one should not ignore the qualitative components, which are not based on numbers and financial forecasts. Depending on the market situation, qualitative factors such as the history of the company can be just as meaningful as the sales forecast for the coming year. In the tech sector in particular, it is often the case that a good company story is enough to inspire investors in the short term.
Stock IPOs tend to be too expensive
Despite all possible valuation methods and company histories, it is important that IPO investors can assess the opportunities and risks of their investment. Because it may well be possible that the company’s demonstrated capabilities are far above the actual market capabilities of the group. Furthermore, one should keep in mind that IPOs are mostly carried out in so-called bull markets, i.e. when the appetite for shares is relatively high. These circumstances make value investors in particular shy away from IPOs. Because in a euphoric market environment, there is a greater risk that the hype of an IPO will outpace the fundamentals.
IPO euphoria can end in frustration
Basically, the assessment of an IPO is no different from the assessment of a public company. In order not to suffer painful book losses, however, investors should compare the cash flow, balance sheet and profitability of the business model to the expected issue price of the share in the run-up to an issue. Of course, the future growth of the company is also decisive for the price of the share, but you shouldn’t set a multiplier that is too high. Excessive growth fantasies in the run-up to an IPO can cost investors dearly afterwards. Stock market legend and multi-billionaire Warren Buffett warned investors to be careful and said: “You shouldn’t want to play a stupid game just because it exists.”
Pierre Bonnet / finanzen.net
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