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Evaluating a Potential IPO - Part 3 |
by John Jagerson
Beyond the financial statements there is a lot to be learned about a firm through their IPO documentation. This is useful both for investors considering a position in the new public stock (once it becomes available) and clients who need to understand how a firm works and what questions they should be asking. This information is all available within the S1 form filed with and available from the SEC.
In this video I will look at the firm's projections, operations and risk factors. This is not inclusive of all the data available but it is a good representation of the kind of detail an individual investor should be looking for.
To see the first article in this series - Click here.
To see the second article in this series - Click here.
Projections:
Depending on the metric you are looking at, the firm has been growing at compounded rates of 60-80% per year. That seems attractive but the notional value of the underlying forex market is only growing 14% per year. Eventually growth is likely to slow.
Operations:
The firm markets to potential customers by offering "trial" or paper trading accounts that may then convert to an funded account. In this case 2 out of 100 trial accounts turn into an actual tradable account. This kind of detail is important and will help investors understand what acquisition costs are and what factors may affect the conversion metrics in the future.
Within the operational data is an explanation for how the firm handles order flow. Because a forex dealer is the counter-party to each client trade, the firm is able to naturally offset a large percentage of client trades against other contrary client trades. This means the firm has no directional risk and gets to keep the entire spread on both trades.
3. Firms preparing their initial public offering will disclose what risks they consider most important. Among others, Gain identified their net exposure, shrinking bid/ask spreads per trade and an unpredictable regulatory environment as majors risks.
An IPO can be an exciting opportunity but it is important to investigate the firm beyond the news reports and hype often surrounding the event.
Next: How to Profit from Falling or Rising Home Prices
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