There are four factors determine the success of IPOs among them are the company’s age, valuation and profitability trend, according to Goldman Sachs.
The investment bank, Goldman Sachs has identified five factors for the success of IPOs in the capital market, analyzing around 4,481 IPOs over 25 years, according to Business Insider. These factors are sector, company’s age, valuation, direction of profitability, and sales growth.
Goldman Sachs pointed out to the first factors for the success of the IPOs is due to the sector and industry of the company being put on the stock market. During the IPOs trend in the 1990s until the early 2000s, the most popular companies were technology companies, media companies, and telecommunications companies, but the situation changed from 2010, with only 19% of the total companies offered, while the proportion of health care companies rose to 34%.
Goldman Sachs referred that the growth in the offering of healthcare companies was due to the growth in the IPOs of biotechnology companies, and although the increase in the number of health care companies listed since 2010, their performance was the worst compared to other sectors.
The Company’s Age:
The second factor is the Company’s age — Goldman Sachs report argues that it is not a factor affecting the Company’s performance. Some young companies are growing their sales faster.
Goldman Sachs’s report continued: “Companies that were established five years at most before the IPO, achieved sales growth of almost 50% in five quarters after the IPO, compared to a 30% growth in sales for companies established between 5 and 15 years before the IPO, and a 19% growth for companies established more than 15 years before the IPO”.
The report said that the IPOs were becoming more expensive compared to stock market prices, shortly before an economic recession. The report added that, at the height of the technology trend in the early 2000s, valuations for those companies were higher than the average share price of S&P 500 index.
Direction of profitability
Investors are very interested in the timing of listed Companies’ profitability, the report said, noting that during the current offering cycle, profitability in the second or third year indicates a strong performance for the Company.
Sales growth is one of the strongest determinants of the success of IPOs — the report added that Companies launched since 2010, which have achieved 20% growth in sales, have traditionally outperformed the Russell 3000 index over three years, compared to other companies that have been growing at a slower pace of sales.