Page 27 - Initial Public Offering - An Introduction to IPO on Wall Street

2.2.3 Industry Comparables

Industry Comparables are another component of IPO valuation method. If the IPO applicant is
in a market with similar publicly listed firms, a comparison of the valuation parameters
attributed to its rivals will be included in the IPO evaluation.

The reasoning is that investors would be able to pay the same price for a new market entrant
as they already do for existing businesses.

2.2.4 Growth Prospects

An IPO valuation is highly dependent on future growth forecasts for the business. The main
goal behind an IPO is capital financing to fuel growth ambitions. The successful selling of an
IPO is generally dependent on the forecasts for the business, and whether or not they will grow
strongly.

2.2.5 A Compelling Corporate Narrative

Not all of the variables constituting an IPO valuation are measurable. The story of a corporation
can be as important as the predictions of a company's sales.

A valuation method may determine whether or not a corporation provides a new product or a
service that can fundamentally change an industry or be at the forefront of a new business
model.
The companies that invented the Internet in the nineties are a perfect example of this. Since
they were pushing innovative and revolutionary innovations, some of them achieved multi-
billion dollar valuations. This was inspite of the fact that they didn't generate any income at the
time.

Through recruiting experienced professionals and advisors to their workforce, some businesses
will fabricate their corporate image by attempting to create the impression of being a company
with seasoned management.

Often a company's actual results can be distorted by its marketing strategy. This makes it
crucial for early investors to study a business’s financial and be mindful of the consequences
of investing in a firm which has no proven trading history.

2.2.6 Risks of Investing in IPOs

An IPO aims at selling a set number of shares at an acceptable price. As a result , businesses
typically only undertake an IPO when they expect that there will be strong demand for their
stock.
If the demand for a business’s stock is favorable, it is often probable that the speculation around
the offers of the firm will eclipse its reality. This provides a favorable situation for the business
to collect money, but not for those looking to invest in its stock shares.

Page 27