IPO Investment: Understand the Key to Corporate Disclosure and Find Profit Opportunities

The process by which a company initially offers its shares to the general public is called IPO(Initial Public Offering). This stage is a critical turning point for private companies entering the securities market, providing investors with an opportunity to participate in a new enterprise. Public offering investments are among the most watched topics in the stock market each year, with many early investors reporting high returns. However, they can also lead to unexpected losses. Therefore, it is essential to thoroughly understand the IPO mechanism and establish risk management strategies before making investment decisions.

What is an IPO: Definition and Operating Principles of a Public Offering

Basic Concept of a Public Offering

An IPO is the process by which a private company makes its shares available to the public for sale. Through this process, the company raises new capital, and investors gain an early entry point into high-growth potential companies. After listing, share prices are freely traded on the open market, allowing investors to buy and sell their holdings at any time.

The main reason companies choose to go public is capital raising. The funds raised are used for various purposes such as research and development, business expansion, debt repayment, and technological innovation. For example, Coupang raised approximately 4 trillion won through its 2021 IPO and significantly expanded its logistics infrastructure to strengthen competitiveness.

Six-Stage IPO Process

Typically, a public offering proceeds through the following six stages:

Stage 1: Establishment of Listing Plan The company determines the amount of capital to raise, the number of shares to issue, and the expected listing date. It considers current market conditions and the company’s financial status to decide the optimal timing.

Stage 2: Selection of Underwriters(Securities Firms) Global investment banks like Goldman Sachs and Morgan Stanley or domestic major securities firms such as Korea Investment & Securities and KB Securities are selected as underwriters. They handle company valuation, setting the offering price, and recruiting institutional investors.

Stage 3: Disclosure of Company Information and Price Determination The company submits a preliminary listing application to the Korea Exchange(KRX) and registers a securities report with the Financial Supervisory Service. It then discloses financial statements, business models, and risk factors to investors, and through demand forecasting(Book Building) with institutional investors, the final offering price is determined.

Stage 4: Subscription and Share Allocation General and institutional investors apply for subscriptions, and shares are allocated based on competition rates. Popular stocks may have high subscription competition, making it difficult to receive the desired amount, and some may be allocated via lottery.

Stage 5: Listing and First Trading Once trading officially begins on the stock exchange, the initial share price can significantly rise or fall compared to the offering price, depending on market expectations.

Stage 6: Post-Listing Price Fluctuations After listing, share prices fluctuate over the long term based on company performance, industry outlook, market sentiment, and existing shareholders’ selling activities.

Why Investors Focus on IPOs

Investment Opportunities Provided by IPOs

IPOs offer several attractive benefits to investors. First, they can capitalize on the undervaluation at the initial listing. The offering price tends to be conservative, often resulting in substantial gains on the first day of trading. Early investors have the opportunity to realize profits during this period.

Additionally, IPOs allow investors to enter new industries and markets. Tesla’s early listing, for example, provided investors with an entry into the electric vehicle industry, which subsequently led to enormous returns.

Enhanced transparency of company information is another key advantage. Listed companies are required to regularly disclose financial reports, enabling investors to evaluate company performance more clearly. Palantir, for instance, received positive evaluations post-listing due to its stable revenue model and increasing AI demand.

Increased stock liquidity is also a significant benefit. As shares are traded in the open market, investors can sell their holdings at any time. Moreover, listed companies often have dividend policies, with giants like Apple and Microsoft maintaining steady dividends, thereby fostering long-term investor trust.

Advantages and Risks of Public Offering Investments

Advantages: In the early days of listing, share prices can rise sharply compared to the offering price, creating high profit opportunities. Growth companies tend to have high long-term upside potential, and post-listing, investors enjoy liquidity to buy and sell shares as they wish.

Risks: High price volatility can lead to sharp declines in share prices contrary to expectations. Additionally, initial investors are often subject to lock-up periods(Share Sale Restrictions) during which they cannot sell shares, and if company performance falls short of expectations, share prices may drop significantly. The high uncertainty associated with emerging industries or startups must also be considered.

Successful and Failed IPO Cases

Success Stories: Models of Long-Term Growth

Airbnb(Airbnb) - 2020 Listing Despite the COVID-19 pandemic, Airbnb attracted high investor interest, listing at $68 and closing its first day at $146, a 115% increase. Subsequently, as the travel industry recovered, its share price exceeded $220.

Tesla(Tesla) - 2010 Listing Tesla’s valuation has continuously risen alongside the growth of the electric vehicle market, starting with an IPO at $17. Even considering stock splits, as of (2024), its price remains around $400, delivering over 350 times returns for early investors.

Alibaba(Alibaba) - 2014 Listing Leading Chinese e-commerce company Alibaba listed on NYSE(NYSE) with an offering price of $68, closing its first day at $93, a 37% increase. Its market capitalization has since surpassed $200 billion, marking long-term success.

Failure Cases: Lessons from Events

WeWork(WeWork) - 2019 Listing Cancellation Valued over $47 billion, WeWork’s IPO was halted due to excessive spending and management issues that eroded investor confidence. It later merged to go public but filed for bankruptcy in 2023 amid ongoing management struggles.

Roblox(Roblox) - 2021 Listing Listed at $45, Roblox’s shares rose to $77 initially but fell over 50% due to intensified competition and poor earnings.

K-Bank(K-Bank) - Postponed 2024 Listing K-Bank, aiming for a 2024 IPO, had to lower its expected offering price to the lower end of the range due to low institutional investor interest and valuation concerns, ultimately postponing the listing.

Characteristics of Major IPO Markets and Investment Environment

Korea IPO Market

South Korea’s IPO market is growing with active listings of innovative companies in fintech, biotech, and more. Government policies supporting startups and increased venture capital investments are positive factors, along with rising liquidity in the KOSDAQ market, which promotes more listings.

However, foreign investors may face entry barriers, and complex investment procedures and dividend taxation policies require careful analysis of local regulations and market trends.

US IPO Market

NASDAQ(NASDAQ) and NYSE(NYSE) are the world’s most active listing platforms, primarily hosting tech and biotech firms, with ongoing listings of large unicorn companies.

While high liquidity is advantageous, volatility and fierce competition are concerns. Strict regulations and disclosure requirements from the U.S. Securities and Exchange Commission(SEC) must also be considered, necessitating thorough analysis of company financials and industry outlooks.

Hong Kong IPO Market

Hong Kong serves as a key financial hub for Chinese companies seeking overseas listings. Successful IPOs of giants like Alibaba highlight its strengths, including high liquidity and openness to international investors.

However, policy changes by the Chinese government and geopolitical risks are major variables. Data regulations and political uncertainties can impact the market, and sector concentration risks should also be considered.

Key Strategies for Successful IPO Investment

Company Selection Criteria

1. Financial Soundness Review Focus on profitability, debt ratios, and cash flow. Companies with solid financials and high growth potential are more likely to sustain share price increases post-listing.

Apple, for example, has maintained a robust financial structure and innovative product lineup since its 1980 IPO, forming the foundation for long-term growth. Microsoft, listed in 1986, has continued steady growth based on stable earnings and market dominance.

2. Industry Growth Potential Evaluation The industry’s outlook is crucial. Companies in high-growth sectors like AI, cloud computing, and biotech tend to offer ongoing upside after listing.

Conversely, companies in traditional retail or wired communications with limited growth prospects or intense competition may face stagnation risks. Analyzing industry growth and competitive landscape through research reports and market data is recommended.

3. Management Team Competency Verification Leadership experience, vision, and past performance significantly influence future growth. For startups, management capability can determine success or failure.

Reviewing the company’s prospectus, executive resumes, media reports, and previous management achievements provides a comprehensive assessment.

( Risk Management Strategies

Financial Planning Allocate only a portion of your portfolio to IPO investments. While the potential for high returns exists, the risk of significant losses is also high. Invest within your risk tolerance.

Diversification Avoid concentrating investments in a single IPO. Spread investments across multiple IPOs in different sectors such as technology, healthcare, and finance to mitigate sector-specific risks. This approach enhances portfolio stability.

Market Environment Consideration Economic conditions and investor sentiment at the time of IPO are vital. During rising interest rates, growth stocks may decline, so market analysis is essential. Positive investor sentiment can boost IPO prices, while negative environments increase downside risks.

Conclusion: Approaching IPO Investment Correctly

Public offerings present important opportunities for both companies and investors. Companies can raise substantial capital and accelerate growth, while investors can benefit from initial surges and long-term growth prospects.

However, IPO investments involve high volatility and significant risks. Thorough analysis of financial health, industry outlook, and management, along with diversification and prudent capital management, are necessary to minimize risks.

Since IPO markets are influenced by each country’s economic and policy factors, it is crucial to review regulatory environments and economic conditions before investing.

With accurate information and careful analysis, IPO investments can become promising long-term opportunities. Consulting with experts and aligning strategies with personal investment goals and risk tolerance are recommended before making decisions.