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The Initial Public Offering (IPOs)

by Suyeba Aslam

By Suyeba Aslam

Your commercial awareness dose

IPO abbreviated for an initial public offering is the first sale of stock issued by a company. For example, if a company were to sell shares of the business to the public this process is known as ‘initial public offering’. During the process, it is usually the company who decides how many shares it wants to put up in the market, whilst an investment bank will suggest how much the stocks are sold for depending on the demand for them.

A public offering will only occur once the company has decided to go public, in which there may be a variety of reasons to do so. However, in more generalised scenario companies opt to go public in the hope of increasing capital which then allows fund expansion, debt repayment, attract and retain talent or the monetisation of assets.

For a company to have success within the IPO sector, this will guarantee an increase in the capital as being on the stock exchange list will emphasise more publicity for the company. As a result of this, it will allow the sales and profits of that company to increase. For traders, investing within IPOs is very beneficial as it is much easier to buy publicly traded shares, in comparison to shares that have been made private.

On the other hand, the cons of IPOs are that companies involved are public, meaning that they are obligated to abide by the rules and regulations of a governing body. One of the rules may include that public businesses are required to disclose all financial activity such as accounting information, tax and profits. Furthermore, to have initial public offerings it can be very costly, in which the company may be forced to increase any additional funding as a result of its shares performing weakly.

Simultaneously, tech stocks and IPOs have been very hot in demand this year, in which billions of dollars had been raked in from investors irrespective of the pandemic this year. In fact, as a result of the big demand to buy and sell tech stocks, many tech companies in the US had chosen to go public. Amongst the many companies which had gone public, America’s top three tech companies were all included such as Snowflake (NYSE: SNOW), Airbnb (NASDAQ: ABNB) and DoorDash (NYSE: DASH). Collectively, since the initial conversion, the three companies have raised approximately up to 11 billion US dollars since being in the public market.

Before the companies were even considering going public, they had to command valuations in hope of being in the double-digit billions, which would then attract large amounts of funding from private equity firms, fund managers, strategic investors and sovereign wealth funds. Initially, Snowflake had raised to $3.9 billion in September, which led it to be the largest software IPO ever existing. Later on, its offering valued rose to 33 billion US dollar, a number which was more than double before it started trading. Meanwhile, valuations for DoorDash and Airbnb has risen from 85 per cent to 112 per cent.

According to Ari Levey, CNBC, taking such action as a result of needing “outside capital to grow their networks, promote their services, rapidly expand into new markets, hire aggressively and offer incentives to both sides of the marketplace.

Major losses have been shown within the travel industry as a result of the pandemic, where Airbnb who plan to trade under Nasdaq had suffered major ups and downs of annual losses and profitable quarters including the third quarter of this year. During the fourth quarter of last year, the company had profited 1.11 billion US dollars in revenue. However, during the peak of the pandemic all had collapsed, plummeting down to $334.78 million, which equivocate to a loss of 72%.

As infection rates increase, it is once again expected of Airbnb to suffer another loss in the fourth quarter of this year in which the company hopes to prevent this by promoting more domestic travel.

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