An Initial Public Offering (IPO) allows a private company to offer shares to its investors for the first time. IPOs are a good option for investors, but extensive due diligence is the prime requirement before investing. In this blog, we’ll break down the top 5 things you need to know about an upcoming IPO to make an informed decision.
Important Factors to Know about an Upcoming IPO
Investing in an upcoming IPO requires several due diligence to follow. This includes:
1. Understanding the Company’s Business Model
Before participating in an upcoming IPO, one must be well-versed in the company’s business model. Having knowledge of the very basics of the company and what they are engaged in, the investor will be taken sincerely by the company and can get to know the specific services that the company offers, how they make money off them, and the ways the company is planning to gain the trust and retention issue with the customers. This approach will let the investor appraise the company’s technological advances and performance in the future.
Let’s suppose you are planning to make an investment through the IPO for a venture that deals with apps on the tech market. Here, you have to understand the specific apps they offer, how they are monetised (through in-app purchases, advertisements, or subscriptions), and their strategy for the gain of the confidence of the consumer and keeping him/her for a long time. By understanding this, you may also figure out whether the company has a more significant chance of withstanding competitors in the software market for many years or not.
2. Analysing the Financial Health
Recognise opportunities that will help you understand the company’s financial statements. This includes its revenue, profits, debts, and cash flow. After knowing the business data, an individual can make good investment decisions. Depending on the cash flow and profit, the investor can define the company’s financial health and performance. In addition, the investor looks for factors such as income, inventory, and liquidity level that will surely assist you well with the decision to invest in a new IPO.
For example, if a company’s revenue increases over time but profit decreases, it is usually a matter of operational inefficiency. On the other hand, a company that exhibits stable revenue growth, strengthened earnings and solid cash on hand may seek more attractive investment opportunities.
3. Evaluating the Management Team
The management team is the backbone of any firm. Their knowledge, experience, and plans are major contributors to the success of the company. Take the time to discover the backgrounds of the top executives, their achievements over time, and their skill level in executing business strategies efficiently.
This develops the idea that it is reasonable to be employed by a management team with a proven success record in the industry, leadership qualifications, and a clear vision for the company’s welfare. For instance, a management team with a considerable stake in the company is more likely to be devoted to its long-term growth and profitability.
4. Assessing the Market Opportunity
Understanding the market in which the business exists is important. Growth trends in the industry and moving the competitors are the best ways to predict a company’s future share in the market.
For instance, the company operates within a growing industry with high barriers to entry and competitive advantages. With the increase in market demand, it’s may have potential for high growth. But, if there is a high competition scenario, the company may find it hard to distinguish itself from the rest of the companies and take market share.
5. Considering the IPO Valuation
When a company makes an initial public offering, it sets an issue price for the first shares by taking into account parameters such as historical financials, future developments, and changes in market conditions. A detailed analysis helps to determine whether the IPO price is reasonable or overvalued.
Most of the time, investment banks and underwriters give an IPO valuation range using such factors as the company’s financials, industry comparisons, and market demand. It’s essential to evaluate whether the IPO valuation is reasonable or overvalued.
When a company is overvalued following an IPO, its stock price is highly likely to fall after a brief period of enthusiasm. However, if the company is undervalued at the IPO issue, it serves as an opportunity for the investor that it might grow in future.
Conclusion
When you invest in an IPO, you need to make thoroughly informed investment and financial decisions. In addition to looking at the IPO valuation, you should check the company’s business model, review its financial statements, assess the management team, and weigh the market opportunity.
However, there are risks associated with the investment in the IPO. Hence, investment activities should be restricted to risk-tolerance and should be performed with the goals of the budget. If you want to invest through a reliable platform, you can choose to go with Kotak Securities’ Platform or its app. In addition to their simple online process, vast research, and skilled guidance, you can set up a suitable financial portfolio through which you dabble in investment. Kotak Securities’ Kotak Neo App brings on board full service with a variety of features. The app offers in-depth research, financial reports, and expert guidance on Mutual Funds, Futures and Options (F&O), Commodities, and IPOs. The platform enables users to trade Stocks, Mutual Funds, Exchange-Traded Funds (ETFs), and Shares, as well as apply for the IPOs that they want through it.
Also Read: Top IPOs to Invest in 2024
