IPO Valuation – How to determine IPO’s share price?

The global IPO market is experiencing a transitional phase characterized by both challenges and opportunities. As of Q3 2024, markets raised approximately $83.3 billion through 851 deals, reflecting a 21% decline in funds raised compared to the previous years.

Valuation during an Initial Public Offering (IPO) is crucial for several reasons, impacting both the company going public and the investors involved. An accurate IPO valuation is vital for entrepreneurs as it not only determines the initial stock price but also affects investor perception, facilitates capital raising, influences long-term success, and positions the company competitively within its industry.

This comprehensive article will take you through the importance of IPO valuation while explaining factors determining an IPO’s share price.

IPO Valuation

An initial public offering valuation is the method by which an analyst establishes the price at which a company’s shares can be sold to the public. Demand from investors and customers is crucial to the success of an initial public offering. The stock price will rise as a result of increased demand for the company. A number of elements, such as industry comparables, growth expectations, and the company’s story, go into establishing a company’s initial public offering valuation in addition to the demand for its shares.

If an IPO is underpriced, there is a long-term likelihood that investors will be able to keep their gains after the listing. On the other hand, if it is overpriced, you won’t make much money after listing. In general, investors favor initial public offerings with strong corporate profiles and market capitalizations. Potential shareholders carefully consider both of these elements before making a choice.

How do companies implement the IPO stage?

Hiring a bank or banks to conduct the Initial Public Offering is the first step in the process. Investment banks can collaborate with one taking the lead or work independently. The management team, auditors, accountants, underwriting banks, attorneys, and Securities and Exchange Commission (SEC) professionals are all present at the next meeting to discuss the offering and choose the best time to file. Throughout the entire underwriting process, similar meetings take place

After the meeting, the firm must undergo due diligence to ensure the accuracy of the registration statements. Market due diligence, legal and intellectual property due diligence, and financial and tax due diligence are all tasks to be met by the company.

How does IPO valuation work?

The demand from investors for the company’s stock is crucial to a successful IPO. A greater stock price for the company will result from strong demand. Industry comparables, growth expectations, and a company’s history are a few other elements that affect valuation in addition to the demand for a company’s shares.

The S-1 Registration Statement is the ultimate outcome of the due diligence. The material in the statement is determined by the valuation report, which contains previous financial statements, critical statistics, a business description, risk factors, and more. After that, in a pre-marketing session, the price range is determined based on valuation. The S-1 registration statement is amended accordingly before the final price is fixed. Then Investors will be given shares by the investment banks when the IPO is priced, and trading in the stock will begin.

To get the valuation part done, seeking assistance from the experts would ease your job.

Key terms for IPO valuation

Here are a few significant elements that have an impact on the cost of the shares sold in an IPO:

• Growth prospects – The anticipated future growth of the company has a significant impact on the IPO pricing. Main goal is to raise money to support future growth. The company’s predictions and ability to expand quickly are important factors in determining if an IPO will be a success.
• Demand – A company’s value may not always increase if its shares are in high demand. The corporation will, however, be valued at a greater level. Due to the time of the IPO and market demand, two identical companies may have drastically different IPO valuations. Typically, a firm will only conduct an IPO if they believe there is strong investor interest in its stock.
• Industry comparables – The IPO valuation will involve comparing the value multiples assigned to the IPO candidate’s rivals if the field in which it operates has comparable publicly traded companies. Investors will be prepared to spend similarly for a new entrance into the business as they do for existing enterprises, according to the justification.
• Corporate Narrative – Not all of the elements that go into determining an IPO valuation are numerical. The narrative of a corporation can be just as persuasive as its revenue estimates. A valuation procedure may take into account a company’s potential to transform an industry or be at the forefront of a new business model by producing novel goods or services. The corporations that invented the Internet in the 1990s are a good example of this. Despite the fact that they were not yet making any money, several of them were valued at multiple billions of dollars since they were promoting innovative and intriguing technologies.

What are determining IPO share price?

Over the past year, the share price has ranged from a low of $31.34 to a high of $46.90, with a market capitalization of approximately $1.56 billion. Determining the share price for an IPO involves a multifaceted process primarily led by underwriters, who are typically investment banks.

• Valuation of the Company – The IPO s share price is based on overall valuation of the company, which is calculated by dividing the company’s estimated value by the total number of shares to be issued at the time of listing.
• Role of Underwriters – Underwriters valuate market demand and establish a fair offering price. Through a book-building process,they assess interest from institutional investors and adjust the pricing accordingly.
• Pricing Methods – There are two primary methods for setting an IPO share price:
  • Book Building – The company announces a price range, and investors submit bids within that range. The final price is based on demand at the end of the bidding period.
  • Fixed Price – The company sets a specific price before opening the IPO for subscription, which remains unchanged throughout the offering period.
• Market Demand and conditions – The IPO price is also influenced by current market and investor sentiment. If there is high demand for shares, underwriters may increase the offering price to capitalize on this interest. Conversely, if demand is weak, they may lower the share price to attract buyers.

Importance of IPO share price in valuation approaches

The IPO valuation plays a critical role in various approaches to assess a company’s worth before it goes public. Understanding how the share price is determined can provide insights into the valuation methods employed by investment bankers and the factors influencing these evaluations.

• Economic Value/Asset approach – This approach takes into account the Company’s residual revenue, assets, risk-bearing capacity, debts that must be repaid, and other relevant economic elements, the value is calculated mathematically. Enterprise value plus the value of cash and assets less the value of debt and other liabilities equals the value of equity. In the Asset valuation approach, the merchant banker considers several factors, including business residual revenue, debt situation, net asset worth, and many more.
• Comparables Methodology/Market approach – Another common way of assessment of share price is the market value approach, which compares the company to others in similar line of business. Unlike the other strategies, this only functions if there are a sizable number of businesses of a comparable nature to compare the company to. This method can be used to determine the value of a security, a business ownership stake, or an intangible asset. Regardless of the asset, the market approach examines the sales of every comparable asset and makes adjustments for any variances in quality, quantity, or size.
• Price to earning multiple – The market capitalization and annual income of a company are compared to achieve IPO valuation. The price-to-earnings multiple is computed using the net income of the company to get at the exact worth of the company. The majority of the time, however, this strategy is used when a company has positive cashflows and has similar growth and capital structure lines as the comparable companies.
• Income approach – Another popular approach is the income valuation approach, which is predicated on the notion that a company’s true value lies in its potential to generate income in the future. The most popular way to evaluate an asset under the earning value approach is to capitalize on prior earnings. As one of the traditional methods of valuation, the capitalization of earnings methodology aids investors in assessing the potential risks and returns of purchasing a firm.
• Discounted cash flow method – Several specialists collaborate to examine projected cash flows, future performance, investments, potential income sources, and more in a discounted cash-based valuation process. This approach requires a lot of effort and comprehension because it bases its conclusions on a study of business performance that must be properly justified.
• Precedent Transactions – The approach considers the recent IPOs and acquisitions in the same industry to analyze trends in valuation. Comparing how similar companies were valued earlier in other deals allows analysts to estimate whether a current IPO is appropriately priced.

Get your IPO valuation today with Eqvista!

Before you go into an IPO for your company, it’s a good idea to get a valuation first to determine the right share price to set for your company. If you’re an investor, an IPO valuation can show you a company’s financial position before making any decisions.

With Eqvista, obtaining an IPO valuation is simple and stress-free. Eqvista offers clarity on this intricate process, highlighting various factors and methodologies involved. Contact us today to learn more about our services.