[THE VIEW] The Trap of Gongmoja Price and Proper Valuation

Recently, the decline in interest rates is expected to revitalize the Initial Public Offering (IPO) market. In a low-interest-rate environment, market liquidity increases, and investors tend to move their funds to the stock market, where they can expect higher returns. However, an interesting point is that among the eight companies listed earlier this year, seven have stock prices below their offering prices. More than half of the companies listed from 2023 to the first half of 2024 are also trading below their offering prices six months after listing, indicating a need to examine the fundamental causes of this phenomenon.

The offering price is ultimately determined through valuation by the company and underwriters (securities firms), as well as demand forecasting by institutional investors. It reflects not only the evaluation of the company’s growth potential and profitability but also the overall market conditions and investor interest. As shown by subscription competition rates reaching hundreds to even over a thousand to one recently, the market exhibited clear signs of overheating. From mid-2023, the price fluctuation on the listing day expanded up to 400% of the offering price, intensifying speculative sentiment aimed at short-term profits.

This overheating phenomenon is not limited to individual investors. As the enthusiasm of individual investors was detected, institutional investors also actively participated in subscriptions targeting short-term gains, which further drove up the offering prices. Whenever large-scale IPOs appeared or some companies’ stock prices surged immediately after listing, this phenomenon intensified.

It is important to consider that the valuation of IPO companies carries greater uncertainty compared to established listed companies. Companies with a long listing history can be valued relatively stably based on accumulated performance. In contrast, IPO companies generally have a short operating history and tend to emphasize future growth potential rather than current profitability. Early-stage growth companies in deficit have significant uncertainty in future cash flows and sometimes attempt to inflate the offering price with overly optimistic forecasts during the IPO process.

This issue is somewhat inevitable given the characteristics of newly listed companies. Even if startups possess innovative business models or technologies, it is not easy to quantify and evaluate them. Moreover, accurately predicting future growth potential in a rapidly changing market environment is a major challenge. Therefore, investors should approach the growth prospects of IPO companies with a balanced perspective.

When investing in IPO companies, it is necessary to examine various non-financial indicators such as sales growth rate, customer base, and market share, in addition to financial metrics. For companies in the growth stage, the speed of market expansion or customer acquisition ability may be more important indicators than current profitability. Also, checking the lock-up ratio of institutional investors is important, as it can help stabilize stock prices by limiting short-term selling pressure.

Especially for investors considering participation in IPOs, it is essential to thoroughly analyze the industry characteristics and competitiveness of the company. Rather than simply considering returns relative to the offering price, a comprehensive evaluation of mid- to long-term growth potential and market dominance is required. This calls for investment decisions that holistically consider the company’s business plan, management capabilities, and changes in the market environment.

The post-IPO stock price decline can ultimately be seen as a process of market normalization after overheating. While many companies are still successfully listing and establishing growth foundations, investors need to be cautious of excessive expectations and short-term volatility. A prudent investment approach that balances growth potential, profitability, and overall market conditions is necessary. For the IPO market to develop healthily, it is important that both companies and investors make rational valuations and investment decisions from a long-term perspective.

Seonggyu Park, Professor at Willamette University, USA

This content was produced with the assistance of AI translation services.