The public offering price (POP) is the price at which new issues of stock are offered to the public by an underwriter. Because the goal of an initial public offering (IPO) is to raise money, underwriters must determine a public offering price that will be attractive to investors. When underwriters determine the public offering price, they look at factors such as the strength of the company's financial statements, how profitable it is, public trends, growth rates, and even investor confidence.
Breaking Down Public Offering Price (POP)
Investors and analysts sometimes use the POP price as a benchmark against which a stock's current price can be compared. If a company's share price rises significantly above its initial public offering price, the company is considered to be performing well. However, if the share price later dips below its initial public offering price, this is considered a sign that investors have lost confidence in the company's ability to create value.
A public offering price does not necessarily reflect what the shares are worth. Investors can get overly excited about a hot new company and push prices higher than the stock should be. By using the balance-sheet information contained in the prospectus, prospective investors can calculate an accurate share value to help determine whether the market has correctly priced an IPO.
How to Research Public Offering Prices
The main way to research an IPO price is to contact the underwriting bank for the offering and get a copy of the prospectus. Find the financial data contained in the prospectus. Locate the balance sheet and find the stockholder’s equity section. Look for the amount under the “paid-in capital” heading, which is the money the company has received from the sale of IPO stock.
As an example, let’s say the balance sheet reports $500,000 as the amount of “paid-in capital.” Locate the number of shares the company has sold in the stockholder’s equity section. Divide the number of shares sold by the amount of “paid-in capital” to get the value of one share of stock. For example, if the company has sold 25,000 IPO stock shares for $500,000, you would divide the 25,000 shares by the $500,000 paid-in capital amount to arrive at a $20-per-share book value.
You should also consider qualitative factors when judging a public offering price. For example, market perception can assign a higher value to a high-tech company over a new breakfast cereal company because investors are more attracted to high-tech. An IPO company can also hire a well-known board of directors, which gives the appearance that competent professionals lead the company. However, while qualitative factors can increase or decrease the market’s perception of what the stock is worth, the actual book value remains unchanged. Investors must decide for themselves if an IPO stock is worth the POP.