For the most part, I consider the acronym “IPO” to actually stand for “It’s Probably Overpriced.” There’s just so much hype around an initial public offering that the market frequently prices shares unrealistically, or they reach that level very quickly. Source: Flickr
There are many reasons for why this happens, even with companies that don’t have actual earnings or for those that aren’t even that sexy. The idea an IPO puts in most investors’ minds is that it represents some amazing thing and that one can get in on the ground floor.
Because the number of shares offered in the float isn’t terribly large, if there’s even a whisper of hype, it can create momentum buying. Sellers dump shares as they rise to new buyers, who dump shares to the next group of buyers, and so on. Only when the business has been reporting for several quarters do investors start looking at valuation. Read