What Are IPOs?
By Ethan Yan | June 14, 2026
What is an IPO?
An Initial Price Offering (IPO) is when a private company decides to issue company shares to the public. They make a percentage of their ownership publicly available, allowing new public investors to purchase and sell these shares on a public exchange. Keep in mind that an IPO is different from the Open Price. The value of an IPO is decided by the company and underwriters, where it’s not affected by the market. Once it’s available to public, it’ll typically change in value from the market, which is why you usually see it inflated or deflated from the IPO value if you were to buy.
purpose of an ipo
The two dominant reasons why a company would issue an IPO is to raise capital for future growth opportunities and to provide liquidity to existing shareholders. They may also want to pay off existing debts, hire new employees, or expand their operations.
Although the stock will have value by itself, it’s likely that a new public company will not pay dividends to their shareholders. This is because they’re using that money to reinvest and all profits will likely be going into new capital. When a company decides to consistently give out dividends, it signals slower growth, which means the stock value won’t increase as much, but will give consistent ordinary income.
IPO Process
1.
When a company decides that it wants to issue an IPO, they must go through a due diligence period. During this period, the company must disclose all organizational data, licensing and taxation, board and employee information, financial information, customer/service information, and company properties.
2.
Once they pass this period, the company works with investment banks (underwriters), securities attorneys, and auditors to determine the IPO value, number of shares to issue, and the IPO launch timeline.
3.
After the IPO valuation, the company must file an S-1 document with the U.S. Securities and Exchange Commission (SEC) before it can go public. This documentation provides full transparency of the company’s financials and operations about what it plans to use the raised capital for. These documentations are available to the public.
4.
When a company completes the S-1 Form, they are committed to going public. Then they will work with other institutions to advertise and market the company shares and build a demand for their stock.
5.
When all paperwork is finished and the IPO timeline is complete, the company will issue their stock on a public exchange, where investors can purchase and sell the stock.
Investing in IPOs
When you understand why a company issues an IPO, it might always seem like a good idea to invest in one. They can use these new capital gains to reinvest in the company, providing consistent returns on the investor, thereby making the investment worth it. Unfortunately, this isn’t always the case, nor are successful IPOs easy to spot.
One main problems with IPOs is the lack of history a company has in being a public company. Although they may have been stable and performing well privately, their future stability and financial situation while public is uncertain. Sometimes uncontrollable factors like tariffs and new regulation can negatively affect the company, which no one can realistically predict. Due to this, IPOs are typically high risk and volatile.
Another problem IPOs face is public excitement/hype. I’ve mentioned this before in one of my previous blogs: Discounts, Premiums, and Arbitrages; public excitement can be very misleading, as it drives the value of the IPO up, but if the hype dies down, the value of it also goes down. What this truly means is that the true value of the IPO isn’t being reflected correctly when there is hype surrounding it.
So let’s analyze three types of real life scenarios when a company decides to issue an IPO. The three companies we’ll look at is: Google, Rivian Automotives, and Facebook.
IPO that succeeded: Google
The success of Google made it one of the most anticipated IPOs in the early 2000s. Surprisingly, Google ended up cutting their planned IPO price range of $108 and $135 to $85 and $95. When they launched the IPO’s price, they settled for the lower end of $85 per share, with a valuation of $23 billion at the time.
Something you’ll notice with the graph is the price discrepancy. I mentioned that their IPO price was $85, but in the graph it’s trading at ~$2.50 per share. This isn’t incorrect, but it shows you that you must report split-adjusted prices if you’re going to analyze the company’s share value prior to its IPO. In this case, Google had two major stock splits: a 2-for-1 and a 20-for-1. We can use this formula to adjust the IPO price with the stock split:
IPO Price
Adjusted Price =
Stock Split 1 x Stock Split 2
$85
Adjusted Price = = $2.13
2 × 20
What we’ll notice is an upwards trend of Google’s stock, which is unsurprising since Google was a dominating search engine even in the early 2000s. Looking at it now, according to Yahoo!Finance, the stock has averaged a 24.8% annual gain. However, Google’s success isn’t necessarily pure luck, it’s just that people had faith in the company after it went public. We’ll talk about another IPO that was anticipated, but had a very rough start despite having a similar situation to Google.
IPO that failed: Rivian Automotive
In 2018, Rivian Automotive became known for their outdoor adventure vehicles with high end electric performance technology. It was an innovative luxury vehicle that sold for $80,000 on average. They even had Amazon backing them up, which made them a highly anticipated IPO when they announced they were going public in 2021. Their IPO price of $78 per share was so anticipated, it sold 153 million shares, raising $12 billion to fuel future growth. When the stock went public, the opening price rose to $106.75 and closed at $100.73, raising roughly $86 billion.
Despite the anticipation, the hype eventually died down. One of the major reasons is that many investors analyzed Rivian’s statements, noticing that the company is losing money on every sale and burned their investment money fast. These actions made investors worried about Rivian’s business model, where they believed it would last until 2025, in which they will have to find another way to obtain more investments. For the automotive industry, Rivian’s production and sale is not efficient, nor large enough to succeed in the long term. Despite the hype and anticipation, Rivian Automotive wasn’t prepared to meet the public expectations and failed dramatically.
IPO that prevailed: Facebook
Back in 2006, Facebook became a massive website that revolutionized the social network. The massive user base made Facebook so successful, that when it announced they were going to issue an IPO in 2012, everyone anticipated its launch. The IPO was valued at $38 per share, and on the day of public release, it closed at $38.23.
Everything sounds great, but soon the stock will fall within the same year. By August 2012, the stock dropped half its value, but this is due to two major factors. Many inside traders sold their shares due to the lack of confidence. They were the majority in selling it, as over 57% of sales of the stock were performed by insiders. The other factor is General Motors (GM) pulling out $10 million in advertisements from Facebook as it wasn’t proving to be effective.
By August 2012, the stock dropped half its value, but there are many reasons as to why this could’ve happened. Originally, Facebook’s IPO price ranged from $28 to $35, but increased to $35 to $38 because the underwriters believed the demand would be high. This along with the numbers of shares increasing had a negative reaction, as many investors started to believe it was overpriced and overhyped. Along with that, 57% of insiders traded their stock as they lacked the confidence in Facebook, as a result of the stock losing about $50 billion in value. General Motors (GM) also retracted $10 million in advertisements from Facebook as they weren’t proving to be effective for them.
The reason I have two different charts, one that observes month-to-month and week-to-week, is that the former shows that the value either goes up or really stagnates. It doesn’t correctly reflect what was happening at the time compared to the latter. With week-to-week, we can actually see the prolonged period of price drops and why investors were so reluctant to hold on to it, or to even invest into it. In the end, these reasons caused the stock value to drop half its value, but luckily that wouldn’t last very long. Within a few years, Facebook would eventually steadily rise back up to its original value. Soon it’ll be way above its IPO value, proving its worth in transitioning to a public company.
What can we takeaway?
What we’ve learned is that it doesn’t matter if the IPO is anticipated or overhyped, the end results will always vary and will be difficult to predict. On one hand, it’ll always be successful as the data backs it up. On the other, it can completely fail despite the numbers looking positive. Sometimes it’ll take time for the company to prove its worth, but it’s difficult to figure out why.
Example of Today
The reason why I’m talking about IPOs is because a friend of mine talked about SpaceX’s IPO. What I want to dive into is what can we do to analyze SpaceX to maybe assess whether or not it’s worth investing in their IPO? What we know so far is:
IPO values can start low and build hype when it goes to the public. But when it finally goes public, the prices are volatile and can be greater than the IPO.
We want to analyze the S-1 Form of the company to gather as much info as to what they want to do with the money and how they’ve been performing without the IPO.
The end result of the IPO is uncertain, but could we leverage Facebook’s situation to SpaceX’s future? Let’s try to break down what SpaceX has to offer and maybe learn how an investor would look at this upcoming IPO.
SpaceX S-1 Form Analysis
I cannot lie that this is a lot to take in, even for me when I was researching on what’s important to analyze. However, I want to focus on the first column, as it holds a lot of important information. If you want to look at this form directly, click on this.
Net Margin and Free Cash Flows
What we’ll notice is the operating margin and net margin is pretty much always negative. What this simply means is that SpaceX spends more money than it makes on its operations. Typically with a new business, this is common, but SpaceX is an established company, so what’s happening? If we look at their CapEx in the 3rd column, we can actually see that they’re using a lot of money for capital expenditures, likely trying to expand and fuel future growth. Due to this, we can see why they have negative margins and even negative free cash flows.
Negative free cash flows means there is no extra cash after meeting operating, capital, and adjusting for non-cash expenses. This could signal for poor financial health, but not always. Again, the company is likely using expansionary strategies (the high CapEx), to fuel growth.
Annual growth and revenue
One of the positives is their year-over-year growth percent. We can see that each new fiscal year, they’ve grown tremendously, likely due to their high capital expenditures. If we look at the revenue aspect by itself, they’ve been steadily increasing their revenue each year as well. By comparing their Q1 2025 and Q1 2026, their start in 2026 is actually going a lot better than 2025. If the pattern continues, they’ll likely have higher revenue and annual growth in 2026.
The other factors
Since P/E is negative, there isn’t any takeaway from it other than it means the company isn’t profitable. The P/S ratio tells what the investor is usually willing to pay per sale. In this case, investors are willing to pay $76.7 for every $1 sale. The market cap is valued at $1.4T, but revenue is only at $18.7B, which is a small fraction of their value.
Takeaway
When I researched each value and what they could mean, there is no definitive answer. Which makes sense, since if it gave a clear answer, most investors would know whether or not to invest in the company. Most of my research resulted in ways an investor would look at it and how they would question what those values could mean. For example,
The negative net margin is likely due to expansionary strategies, so a confident investor would ignore this or use another company like Amazon as an example. If Amazon succeeded, then why wouldn’t SpaceX? Conversely, they might view it as a risk, as the company isn’t able to generate any positive profits after expenses. If we use Rivian Automotives as an example, it could be a major loss.
What we should learn from Facebook’s situation is that their value can drop in the beginning, but could potentially see a rise in the long run. If we focus on factors like annual growth, we’d be confident in the stock value. Although if they have a scenario like Rivian Automotive, their value might skyrocket in the beginning and then suddenly drop to rock bottom, never recovering.
I’m not a financial advisor, so this isn’t financial advice. From my research and perspective, it seems best to not immediately invest in the stock and to see what happens over time. Typically the opening price will launch in value due to hype and demand, which will settle out in the long run. However, price drops aren’t so fast, as it could take months or even years before the true value appears.
I’ve already said that individual stocks are high risk, high reward before. The same is true right now. If you’re looking for a safe way to make money, invest in ETFs or Mutual Funds in the industry SpaceX will potentially be in (Aerospace or AI). If they succeed, they will likely be in the top percentage of those market indexes, which ETFs and Mutual Funds will adjust to this new public and successful company. You’ll get less money than the individual stock, but you’ll still be rewarded.
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