How to Analyse an IPO Before Buying It

When Shein finally listed in Hong Kong this week, it provided a useful reminder that an initial public offering is not simply a celebration of a company's growth.

The fast-fashion group raised approximately $1.7 billion at a valuation of around $26.5 billion. That is dramatically below the $98.2 billion valuation Shein achieved in a private funding round in 2022. Its shares then fell as much as 10% during their first trading session and slipped again on their second day of trading.

There is nothing inherently unusual about an IPO trading below its offer price. Nor does a falling valuation automatically make a company attractive. What Shein illustrates particularly well is that investors need to distinguish between a good company, a growing company and a good investment at a particular price.

Before buying any newly listed company, there are several questions worth answering.

Start With the Valuation, Not the Story

IPO marketing naturally focuses on the company.

Investors hear about addressable markets, disruptive technology, rapid expansion, famous customers or ambitious growth plans. These may all be legitimate strengths, but they say relatively little about whether the shares are attractively priced.

The same company can be an excellent investment at one valuation and a terrible investment at another.

For a profitable company, investors might compare the IPO valuation with:

• earnings;
• EBITDA;
• free cash flow;
• book value; or
• comparable listed companies.

For an earlier-stage company that has little or no profit, revenue multiples may be more useful, although they require considerably more caution.

Suppose a company generates £1 billion of revenue and is being valued at £10 billion. The investor is effectively paying 10 times revenue.

That number means very little in isolation.

If comparable companies trade at three times revenue and have similar margins and growth, the IPO may be expensive. If the business is growing much faster and has significantly stronger economics, the premium may be justified.

This is where Shein becomes interesting.

Its private valuation reached $98.2 billion in 2022. By the time it came to market, investors were only prepared to support a valuation of roughly $26.5 billion. That does not necessarily mean the IPO was cheap. It tells us that the previous private-market valuation was no longer a useful reference point.

Private valuations can be established during small funding rounds involving relatively few investors. Public markets eventually have to answer a more difficult question:

What is the entire company worth when thousands of investors can continuously buy and sell it?

That is the valuation that ultimately matters.

Look at What the Company Is Doing With Your Money

One of the most important pages in an IPO prospectus is often labelled Use of Proceeds.

An IPO can contain newly issued shares, existing shares being sold by current shareholders, or a combination of both.

When the company issues new shares, cash enters the business.

Investors should ask what management intends to do with it.

There is an important difference between a company raising £500 million to build new factories and one raising £500 million primarily to repay debt accumulated before listing.

Neither is automatically good or bad, but they tell different stories.

Capital being invested into profitable expansion can increase the company's future earning capacity. Capital being used to repair a stretched balance sheet may simply resolve problems created before public investors arrived.

Shein provides a reasonable example of why this section deserves attention. Its prospectus allocated approximately 40% of net IPO proceeds to technology, 40% to strengthening its brand and global presence, 10% to corporate-responsibility initiatives and the remaining 10% to general corporate purposes.

The investor's next question should therefore be:

What return is the company likely to earn on this additional capital?

Raising money is not value creation by itself. Management still has to deploy it productively.

Find Out Who Is Selling

This is one of the simplest but most overlooked IPO questions:

Who is actually selling the shares?

There are two basic types.

A primary offering involves the company creating new shares and receiving the proceeds.

A secondary offering involves existing shareholders selling some of their holdings. The money goes to those shareholders rather than the company.

Secondary selling is not automatically a warning sign. Founders, employees and venture-capital funds may have owned shares for many years and reasonably want some liquidity.

The scale matters.

Imagine a founder owns 60% of a business before its IPO and sells 5% of the company. That may simply be sensible diversification.

If the founder attempts to sell almost their entire position while encouraging new investors to buy, the incentives look very different.

Look at founders, private-equity owners, venture funds and senior executives.

Ask:

Are the people who know the company best increasing their economic exposure, maintaining it or trying to reduce it aggressively?

That can be more informative than the optimistic language on the first 20 pages of the prospectus.

Revenue Growth Matters, but the Direction Matters More

One of the most attractive features of many IPOs is rapid growth.

But investors should look beyond the headline percentage.

Consider a hypothetical company whose revenues increase:

80% → 50% → 30% → 15%

The company is still growing.

But the investment story is changing dramatically.

A valuation appropriate for an 80% growth business may become very difficult to justify once growth falls towards 15%.

Shein again provides a useful example. Its revenue increased from approximately $32.1 billion in 2023 to $38.7 billion in 2024 and $41.8 billion in 2025. But the growth rate slowed from 41.1% in 2023 to 20.7% in 2024 and 8.0% in 2025. Revenue growth in the first quarter of 2026 was just 1.1% year-on-year.

That tells an investor considerably more than simply saying:

Shein generated more than $40 billion of annual revenue.

The important questions are:

How quickly is revenue growing?

Is growth accelerating or decelerating?

What is driving that growth?

And perhaps most importantly:

How much growth is already assumed by the IPO valuation?

A rapidly growing business can still disappoint investors if the IPO price assumes even faster growth.

Profitability Is More Important Than Being Profitable

Seeing positive net income is a good start.

It is not the end of the analysis.

Investors should examine how the profit is being generated.

Look at:

• gross margins;
• operating margins;
• EBITDA;
• net income;
• free cash flow;
• share-based compensation; and
• unusual accounting gains or losses.

Shein generated approximately $2.1 billion of net income in 2025, but its net margin fell to 4.9% from 8.7% in 2024. It then reported a $99 million net loss in the first quarter of 2026, although part of this reflected a fair-value accounting adjustment relating to convertible preferred shares.

This distinction matters.

A company can report impressive net income because of one-off asset sales, revaluations or accounting adjustments that have little to do with the underlying business.

Conversely, a company might report a temporary accounting loss while its core operating business remains profitable.

For IPO analysis, investors should therefore spend more time asking:

What does normalised profitability look like?

That usually provides a better indication of what the company might earn several years after listing.

Understand Dilution Before Looking at Earnings Per Share

An IPO usually creates additional shares.

That means existing shareholders own a smaller percentage of the business afterwards.

This is called dilution.

Imagine a company has 100 million shares before an IPO and issues another 25 million.

There are now 125 million shares.

An investor analysing future earnings per share needs to use something closer to the post-IPO diluted share count, not the historical number of shares.

There may also be further potential dilution from:

• employee stock options;
• restricted stock units;
• convertible securities;
• warrants;
• preferred shares; and
• future employee incentive plans.

This is particularly important with venture-backed companies because their capital structures can be complicated.

Shein's prospectus, for example, contained conversion-adjustment arrangements protecting certain pre-IPO preferred investors following the significant reduction in valuation. The arrangements included the issuance of additional Class B shares to affected investors.

For an investor, the lesson is broader than Shein:

Never calculate valuation using the headline share count alone.

Find the fully diluted share count and determine what percentage of the company public investors will actually own.

Governance Can Matter as Much as Growth

Buying a share means buying part of a company.

But owning part of a company does not necessarily mean having proportional control over it.

Increasingly, founders list companies using dual-class or weighted-voting structures.

These structures give certain shareholders more votes per share than ordinary public investors.

They can have advantages. Founders can pursue long-term strategies without worrying excessively about short-term shareholder pressure.

But they also weaken one of the traditional mechanisms through which shareholders hold management accountable.

Shein, for example, listed using a weighted-voting-rights structure. Its Class A shares carry 10 votes each, compared with one vote for each publicly traded Class B share. Its weighted-voting-rights beneficiaries retain the overwhelming majority of shareholder voting power after the offering.

Investors should therefore examine:

• founder voting power;
• board independence;
• related-party transactions;
• executive compensation;
• auditor relationships;
• shareholder rights; and
• whether management can issue additional shares without significant shareholder approval.

Strong growth does not compensate indefinitely for weak governance.

Minority shareholders ultimately depend on management allocating capital in their interests.

Pay Attention to Lock-Ups

Lock-ups are one of the more technical parts of an IPO, but they can have very practical implications for the share price.

Early shareholders are often prohibited from selling immediately after the company lists.

The restriction may last three months, six months, twelve months or longer.

When that period ends, millions of previously restricted shares can potentially enter the market.

That does not mean they will all be sold.

But the potential supply of shares increases.

Imagine an IPO where only 15% of the company initially trades publicly. Six months later, shareholders controlling another 40% become free to sell.

Even if the business has not changed, investors may start worrying about the additional supply.

That is why the expiry date matters.

In Shein's case, several major shareholder vehicles agreed to 24-month lock-ups, while pre-IPO investors generally agreed to six-month restrictions.

Before purchasing any IPO, investors should therefore know:

When do the major lock-ups expire?

It can be useful to place the dates in an investment calendar.

Do Not Confuse the IPO Price With Fair Value

Another common mistake is assuming that the investment banks running the IPO have somehow determined the company's fair value.

They have not.

The offer price is the price at which the company and its advisers believe they can successfully sell the shares.

Several parties have different incentives.

The company generally wants a high valuation.

Existing shareholders may want a high valuation.

Investment banks want the transaction completed successfully.

Institutional investors want the lowest price possible.

Those competing interests eventually produce an IPO price.

The market then begins the real valuation process.

That is why some IPOs rise dramatically on their first day while others fall immediately.

Shein's weak opening does not, on its own, prove that the company was overpriced. But it does demonstrate that an IPO price should never be treated as an independent assessment of intrinsic value.

Investors still have to perform their own valuation.

The Eight Questions to Ask Before Buying an IPO

Before investing, an investor should be able to answer eight questions:

| Question | What You Are Looking For | | ------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | | 1. What valuation am I paying? | Compare the IPO valuation with earnings, revenue, cash flow and listed competitors. | | 2. Where is the IPO money going? | Determine whether capital is funding expansion, strengthening the balance sheet or simply providing liquidity. | | 3. Who is selling? | Large insider exits deserve closer examination. | | 4. How quickly is revenue growing? | Look at the trend rather than one headline growth number. | | 5. Is the company genuinely profitable? | Separate underlying operating performance from accounting adjustments and one-offs. | | 6. How much dilution is occurring? | Calculate the post-IPO and fully diluted share count. | | 7. Who actually controls the company? | Examine voting rights, board composition and founder control. | | 8. When do lock-ups expire? | Understand when additional shares could become available for sale. |

If you cannot answer these questions, you probably do not yet understand the IPO well enough to invest in it.

Sometimes the Best IPO Strategy Is to Wait

There is another option investors frequently overlook:

You do not have to buy an IPO.

A company becoming publicly traded does not mean the opportunity disappears after its first day.

Waiting can actually provide several advantages.

The company begins reporting as a public business. Investors receive more earnings releases. Management establishes a track record of guidance. Early excitement fades. Lock-ups expire. And the market gradually develops a better understanding of the company's appropriate valuation.

Some exceptional companies have been outstanding investments despite being purchased years after their IPOs.

Being early is considerably less important than being right about the business and the price.

The Bottom Line

IPOs are attractive because they combine novelty, growth and scarcity. Investors are being offered something that was previously unavailable on the public market.

That excitement can also make them unusually difficult to analyse objectively.

Shein's journey from a private valuation approaching $100 billion to a roughly $26.5 billion public valuation is a particularly striking example of how dramatically perceptions of value can change. Its business did not suddenly become one quarter as large. Rather, growth expectations, profitability, tariffs, regulatory risks, competition and investor willingness to pay changed.

That is ultimately the purpose of IPO analysis.

Do not ask simply whether the company is exciting.

Ask what you are buying, what you are paying, where your money is going, who controls the business and what has to happen for today's valuation to make sense.

The opportunity to buy a company for the first time is not the same thing as an opportunity to buy it cheaply.