Part 1 covered how to access IPOs. Part 2 covers the more important question: should you invest?
Let me state this clearly. Most IPOs are terrible investments. Companies go public when insiders want to cash out at peak valuations. And the responsibility falls to you to separate the rare-quality deals from the hype machines.
Here's how professional investors evaluate IPOs before risking capital.
Confessions Of The 1% Class
My name is Dr. Mark Skousen.
I've worked for the CIA. I've shaken hands with four U.S. presidents. I've consulted for Fortune 500 companies.
For 45 years, I've been in rooms where the big money gets made before the ink is dry.
Private deals. Pre-IPO stakes. The kind of opportunities regular Americans never hear about.
And I'm tired of watching the rich get richer while everyone else gets left behind.
So I'm doing something about it.
I met Elon Musk face-to-face at a private gathering of the world's financial elite.
The video of our meeting has gone viral across the internet.
And what I learned that day — combined with my own research — has convinced me that Elon will announce the SpaceX IPO on April 20th.
That's less than two weeks away.
Industry experts are calling it a "seismic event" — a $1.5 trillion valuation that could be the biggest IPO in Wall Street history.
And I want to share everything I know with my readers.
Including a free ticker I found that lets you grab a pre-IPO stake in SpaceX... before Elon steps up to that podium.
Read the S-1 Registration Statement
The S-1 is the legal document every company must file with the SEC before going public.
It contains everything: financial statements, business description, risk factors, use of proceeds, and management compensation.
This is not marketing material. It's a legal disclosure where companies must reveal problems.
Where to find it: Search "[Company Name] S-1" on the SEC's EDGAR database or the company's investor relations page.
What to read first: Risk Factors section and Management Discussion & Analysis (MD&A).
This is where companies bury the bad news because they're legally required to disclose it.
The Basic Valuation Metrics
Compare the IPO price to similar public companies using two simple ratios:
Metric | What It Measures | When to Use | Benchmark |
|---|---|---|---|
P/E Ratio | Price per share ÷ Earnings per share | Profitable companies | Nasdaq: 40x, S&P 500: 25x |
P/S Ratio | Market cap ÷ Annual revenue | Unprofitable growth companies | Tech: 5-8x, SaaS: 8-15x |
Example P/E: IPO price $20, earnings $1 per share = 20x P/E (reasonable)
Example P/S: Market cap $5B, revenue $500M = 10x P/S (expensive for most sectors)
If an IPO prices above sector benchmarks, it needs exceptional growth to justify the premium. It is better to avoid such IPOs.
The Rule of 40 for Tech Companies
For software and SaaS companies, check if they pass the Rule of 40 test.
Company Example | Revenue Growth | Profit Margin | Total | Pass/Fail |
|---|---|---|---|---|
Healthy Growth | +60% | -10% | 50% | ✓ Pass |
Balanced | +25% | +15% | 40% | ✓ Pass |
Burning Cash | +20% | -30% | -10% | ✗ Fail |
Slow & Unprofitable | +15% | -20% | -5% | ✗ Fail |
Add revenue growth rate and profit margin. Total should exceed 40%. Companies below 40% need a credible path to profitability. Most don't have one.
Red Flags to Avoid
Certain S-1 disclosures signal danger. Walk away if you see these:
Dual-Class Share Structures
Some IPOs issue multiple stock classes with different voting rights.
Example: Class A shares (public) get 1 vote. Class B shares (founders) get 10 votes.
Result: Founders control the company despite owning a minority of shares.
Real example: Expensify issued LT50 shares with 50 votes per share. Public shareholders had zero influence.Massive Stock-Based Compensation
Companies use "Adjusted EBITDA," removing stock-based compensation, to look profitable.
Problem: Stock-based compensation is real. It dilutes your shares every quarter.
If a company excludes 30-40% of expenses as "non-recurring" stock compensation, the reported profits are fiction."We May Never Be Profitable"
Literally, this phrase is in the Risk Factors section.
If management admits they may never make money, believe them.PIK Toggle Debt
Paid-In-Kind debt allows companies to pay interest with additional debt rather than cash.
This means the company is so cash-poor it can't afford interest payments.
Future: massive dilution when debt converts to equity.
Grey Market Indicators
The "Grey Market" is unofficial trading before the IPO, where investors trade rights to shares.
In the US, this happens through private platforms for accredited investors. The Grey Market Premium (GMP) shows expected listing gains.
Formula:
GMP = Unlisted Price - IPO Issue Price
GMP % = (GMP ÷ IPO Issue Price) × 100
GMP % | Signal | Interpretation |
|---|---|---|
+50% or higher | Very hot | Strong demand, likely day-one pop |
+20% to +50% | Positive | Good demand, moderate gains expected |
0% to +20% | Neutral | Fair pricing, limited upside |
Negative | Weak | Overpriced, may open below IPO price |
Proxy indicators in the US:
Institutional Interest Signals
The quality of underwriters and institutional demand tells you if smart money believes in the deal. High institutional oversubscription means professional money managers believe the valuation is fair.
Anchor Investor Certification
"Anchor investors" are major institutions committing to large purchases before the public offering.
Examples: Sovereign wealth funds, pension funds, major mutual funds. They receive guaranteed allocations in exchange for longer lock-up periods (can't sell immediately).
Why it matters: These investors attend roadshows, review financials extensively, and negotiate terms. Their participation validates the deal.
Where to find this: Look for "expressions of interest" from institutional buyers in amended S-1 filings.
If no major institutions are anchoring, it's a red flag.
The Checklist Summary
Before buying any IPO, verify these items:
Financial health:
P/E or P/S ratio comparable to public peers
Passes Rule of 40 (for tech/SaaS)
Clear path to profitability with a timeline
Corporate structure:
No dual-class shares giving founders 10x voting control
Stock-based compensation below 20% of revenue
No PIK debt or desperate financing
Market validation:
Grey Market Premium positive
Reputable lead underwriter (Goldman, Morgan Stanley, JPMorgan)
Institutional oversubscription 5x or higher
Major anchor investors disclosed
Red flag check:
No "may not achieve profitability" language
Adjusted EBITDA doesn't exclude massive real expenses
Use of proceeds makes sense (growth, not debt repayment)
If any red flag appears, walk away. There will always be another IPO.
The Bottom Line
Most retail investors who get IPO access receive shares in deals institutional investors don't want.
Hot IPOs with 10x oversubscription go to big institutions. Lukewarm deals with weak demand get distributed to retail.
Your $100,000 Fidelity account gets access to the IPOs that Goldman Sachs clients passed on.
What I’m telling you is not a conspiracy. It's market structure. Institutions provide 90% of capital, so they get first pick.
If you still want to take risks with IPOs, use the evaluation framework above to separate the rare-quality deals from the garbage that retail investors get stuck with.
If metrics look good, the grey market is positive, and institutions are buying heavily, you might have a winner.
If not, pass. Letting an overpriced IPO trade for six months often provides better entry points than day-one allocations.
Important disclosures: This newsletter is provided for informational purposes only and does not constitute investment advice. All investments involve risk, including possible loss of principal. Please consult with your financial advisor before making investment decisions.
