First of all let us understand the IPO meaning

IPO means the process by which a private company become publically traded on the stock exchange and it is owned by the shareholder who purchase companies’ share when it is available in the ,Market

Now let us discuss the IPO valuation

Generally price of any financial assets that are traded in the market is decided by supply and demand Factor but new issue of the share do not have pasts demand and supply experience and they are unique stock because they are newly issued hence the best analysis is expert analysis who evaluate the stock

The companies that issue IPOs have not been traded previously on an exchange and are less thoroughly analyzed than those companies that have been traded for a long time.

Following points should be considered at the valuation of newly issued Share

1. Why has the company elected to go public?
2. What will the company be doing with the money raised in the IPO?
3. What are the company’s growth prospects?
4. What level of profitability does the company expect to achieve?
5. What is the management like? . What is the business’s operating history, if any? etc

Let us take one example

Example : Company ” Twitter”

It has decided to go for public Via IPO before Twitter go for Public it is privately owned by founders ,early employees and early investor .And they are N Number of share(475 M) .Now it decides to provide the public with the opportunity to share in the ownership of Twitter. For the founders of Twitter, the upside of this is that Twitter becomes a richer company, and they can use the new money to develop the company into an even better and profitable company.

Now they decided to issue M Number of New Share and sell them for $x each, Twitter adds $xM to its bank account, but everyone who already owns Twitter shares has their ownership in the company reduced by the factor N / (N + M). Twitter needs to choose M first, because what x should be depends on M: x needs to be a price that the public would be willing to pay to own 1 / (N + M) of Twitter. Twitter decides to offer 70 million shares on the public market. This means that current shareholders of Twitter have their stakes decreased by a factor of 475 / (475 + 70) = 13 p. Twitter sets its IPO price at $26. At this point, Twitter knows that it will raise exactly $26 x 70 million = $1.8 billion in cash from this offering. We say that this offering price values the company at $26 x (475 million + 70 million) = $14.2 billion (The only way you can say what a company is worth is by seeing how much someone else would pay for it, or at least how much he would pay for a share of it.)

So this way IPO and its valuation go on