Why are IPO's undervalued?

[veggz]

Maybe there isn't any clear cut evidence of this in the long run, but why are they initially undervalued? Wouldn't a company stand to raise more capital if the price were set higher?

 

[Einz]

Why do you say they're undervalued?

 

[DaVortex]

their undervalued because people dont really know what the stock is really worth since they dont publish any earnings

 

[IHAVEAQUESTION]

How does a company raise more capital if the valuation of the company is low? Unless there is a hype in the market otherwise it's just unrealistic.

 

[ultimatebob]

Most IPO's are issued at the proper valuation for the company, but occasionally become over hyped and overbought when they IPO. Because of this, they quickly become OVERVALUED and sell off quickly once investors come to their senses and start looking at the financials.

 

[spidey07]

Originally posted by: veggz
Maybe there isn't any clear cut evidence of this in the long run, but why are they initially undervalued? Wouldn't a company stand to raise more capital if the price were set higher?

You're not very bright are you?

What an utterly dumb question to ask.

-edit- you're still in middle school I take it? This is basic economics taught to high school freshmen.

 

[flashbacck]

Originally posted by: ultimatebob
Most IPO's are issued at the proper valuation for the company, but occasionally become over hyped and overbought when they IPO. Because of this, they quickly become OVERVALUED and sell off quickly once investors come to their senses and start looking at the financials.

yup!

their undervalued because people dont really know what the stock is really worth since they dont publish any earnings

I think IPO filings should have numbers from the past few years contained within.

 

[everman]

Just this year we have the likes of Vonage and Burger King, both of them were dogs. Don't go thinking IPOs are easy money like in the dot com boom.

 

[halik]

Originally posted by: veggz
Maybe there isn't any clear cut evidence of this in the long run, but why are they initially undervalued? Wouldn't a company stand to raise more capital if the price were set higher?

Public offerings are set at the calculated value of the company - you plug the data from their books into your models and then crank out pitch books / red herrings with whatever number you come up with.

The fact that the shares take off is usually a signal that the investors believe the company will grow. Last thing you'd wanna do is to overvalue and have the initial offering drop (cough citi/vonage).

 

[DaveSimmons]

Google's stock had a huge jump in share price, but it was and is a risky bet. Almost all of their money comes from ad revenues, a single source that could drop sharply in value at any time.

They're also unique in having incredible name recognition and their own verb in the dictionary.

How many other undervalued IPOs can you think of?

 

[veggz]

Originally posted by: spidey07

Originally posted by: veggz
Maybe there isn't any clear cut evidence of this in the long run, but why are they initially undervalued? Wouldn't a company stand to raise more capital if the price were set higher?

You're not very bright are you?

What an utterly dumb question to ask.

-edit- you're still in middle school I take it? This is basic economics taught to high school freshmen.

Sigh.. please do not insult my intelligence; let me be clear that chances are that I am substantially smarter than you.

I ask because I remember this as being one of the questions in my first round Merrill Lynch interview that I was not sure of the answer to. I BS'ed something about the potentially disastrous effects of an ambitious price, but I wanted to be sure of what the answer actually was.

Sorry if I came off as a bit cranky and inarticulate, but I have not slept in 48 hours and will probably be at the office till 3am again tonight.

By the way, thanks for all the helpful responses

 

[spidey07]

lol, veggz, if you were so smart you'd realize that you took the bait - hook, line and sinker.

If you are so smart you wouldn't ask your question.

the price paid is what the market will bear. I insult your intelligence because you flaunt it, and yet are so dumb.

 

[mugs]

Originally posted by: spidey07
-edit- you're still in middle school I take it? This is basic economics taught to high school freshmen.

Umm.... no it's not.

 

[veggz]

Originally posted by: spidey07
lol, veggz, if you were so smart you'd realize that you took the bait - hook, line and sinker.

If you are so smart you wouldn't ask your question.

the price paid is what the market will bear. I insult your intelligence because you flaunt it, and yet are so dumb.

Spidey, I realize that you were baiting me, but I get very touchy when my intelligence is in question, especially since it was only attained after many years of incredibly hard work.

And I'm not sure I follow your logic in concluding that I am dumb since I asked the question.

 

[spidey07]

Originally posted by: mugs

Originally posted by: spidey07
-edit- you're still in middle school I take it? This is basic economics taught to high school freshmen.

Umm.... no it's not.

what????

Supply/demand.

 

[veggz]

Originally posted by: spidey07

Originally posted by: mugs

Originally posted by: spidey07
-edit- you're still in middle school I take it? This is basic economics taught to high school freshmen.

Umm.... no it's not.

what????

Supply/demand.

Not exactly.. read some of the other responses in this thread.

 

[spidey07]

Originally posted by: veggz

Originally posted by: spidey07
lol, veggz, if you were so smart you'd realize that you took the bait - hook, line and sinker.

If you are so smart you wouldn't ask your question.

the price paid is what the market will bear. I insult your intelligence because you flaunt it, and yet are so dumb.

Spidey, I realize that you were baiting me, but I get very touchy when my intelligence is in question, especially since it was only attained after many years of incredibly hard work.

And I'm not sure I follow your logic in concluding that I am dumb since I asked the question.

People who are backing the IPO want the most for their money, hence price low. Contrast that with those who stand the most to gain given suplly/demand, couple it with marketing and you have answered your own question.

 

[RedPickle]

Oftentimes, the undervaluing of an IPO is done so that the underwriters can buy it at a lower, agreed upon price, rather than receive payment for services. After the underwriters buy their share of the IPO, which may be the entire issue, they then resell it to the general public (or private lots), thereby increasing the price dramatically. So what is undervalued may not be the price at which you (the public) purchase it at.

 

[ultimatebob]

Originally posted by: flashbacck

I think IPO filings should have numbers from the past few years contained within.

They do, actually. If you want to invest in IPO's, you really should read the prospectus to insure that the company is growing it's revenues quickly while keeping expenses under control.

 

[DeeKnow]

Investment Bankers like to price the IPO slightly lower than the level at which they 'think' it will trade on Day 1

- if that happens all the time, it generates interest among investors in plonking down their cash for an IPO
- more often than not, these sleazeballs were able to 'allot' IPO shares to their buddies (CEO's who paid them back by directing the company's business towards them). In this way, everybody wins. well everybody except the company whose shares are being sold below real value

sure, pricing the IPO higher will allow the co to raise more capital. but then, pricing soap higher will also allow Unilever to make more profits... trouble is, buyers are not stupid. they have options... like other IPOs, for instance. or the secondary market. or the debt market.

 

[ElFenix]

Originally posted by: DeeKnow
Investment Bankers like to price the IPO slightly lower than the level at which they 'think' it will trade on Day 1

- if that happens all the time, it generates interest among investors in plonking down their cash for an IPO
- more often than not, these sleazeballs were able to 'allot' IPO shares to their buddies (CEO's who paid them back by directing the company's business towards them). In this way, everybody wins. well everybody except the company whose shares are being sold below real value

sure, pricing the IPO higher will allow the co to raise more capital. but then, pricing soap higher will also allow Unilever to make more profits... trouble is, buyers are not stupid. they have options... like other IPOs, for instance. or the secondary market. or the debt market.

ding ding ding!

don't forget that they also don't want to be left holding the bag just in case their valuation estimate was high.