As the world has begun to move towards “business as usual” since the onset of the COVID-19 pandemic, the number of companies conducting an initial public offering (IPO) is on the rise.
With a more active IPO landscape this year, there’s a lot to get excited about in the leadup to an IPO. But how can the success of an IPO be measured? The answer: It depends. Keep reading to learn more about the different ways a company’s IPO success can be gauged.
Immediate indicators of success
First-day “pop”
The first-day “pop” is one of the most commonly talked about indicators of a successful IPO. A pop occurs when a company’s closing price jumps significantly from its opening price. While it’s great to see higher than expected demand for a stock, a first-day pop also indicates that a company’s stock may have been undervalued, which means that the company could have raised more in its public market debut. For pre-IPO investors, however, a first-day pop is beneficial. First-day pops also tend to generate a significant amount of media buzz, which can bring the company more visibility.
Capital raised
When going public, a company will set how many shares it plans to sell in its offering as well as a price range per share. These two numbers can give you a range of how much the company hopes to raise. For example, in its upcoming IPO, Robinhood is seeking to sell 55 million shares at a range of $38 to $42 per share. Assuming the company meets this goal in its IPO, it could raise as much as $2.3 billion. If a company meets or surpasses its raise goal in its IPO, that’s a clear sign that it achieved what it set out to in its public debut.
Near and long-term indicators of success
Share price appreciation
Especially for pre-IPO investors, share price appreciation is an excellent measure of a company’s “success” in its IPO, whether that be within the first day of trading or from the IPO to the present. Naturally, a win for investors is seeing a return on their initial investment.
Meeting forecasts
After a company goes public, there is often a high level of scrutiny on whether or not it’s meeting its forecasts. Traditionally, investors and stock market analysts will expect to see that a company meets its own earnings-report forecasts for at least eight quarters (or two years) after its public debut. This period is viewed as a sort of “test” in which a company has the opportunity to gain the trust of the public market. When companies fail to meet their own forecasts during this period, it can undermine investor confidence in the stock long-term.
Improved visibility
Sometimes these companies are relatively unknown, but if they’re able to pull off a successful IPO, the media buzz surrounding the event can drum up additional interest and visibility. While it’s difficult to measure how much an IPO can increase brand visibility, positive press is certainly an indicator of success, as this can certainly influence demand for a stock.
Final thoughts
Whether or not a company’s IPO is successful is not black and white. It will depend on who you’re talking to and what measuring stick they’re using. It’s nearly impossible for an IPO to succeed on all fronts – in some areas it may succeed, and in others, it may fail to meet stakeholder expectations. Oftentimes, there are competing objectives at play, so it’s important to take a holistic approach when assessing a company’s IPO success.
*****
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
