Don't Buy the Next Big IPO Until You Check These 7 Things

The warning hiding in a hyped IPO

0:00 In June of 2026, SpaceX went public at $135 a share and 3 days later into trading, it touched 225. And 7 weeks later, it traded as low as 105. Same company and the warning was sitting in the filing the whole time. An IPO can be the beginning of a generational winner. It can also be the moment where insiders sell you the cleanest version of a messy story. The difference between these two is usually sitting in the filing if you know where to look. I'm going to show you how to analyze an IPO before you invest.

0:40 We will go for seven checks in order. The business and use of proceeds, growth quality, profitability and cash, valuation and dilution, management and governance, risk and concentration, and finally the deal mechanics, float and lockups. This is educational information. Remember that investing in IPOs is very risky, so do not take this as financial advice. The goal is to replace that opening day excitement with a repeatable research process.

What the prospectus (S-1) tells you

1:10 The prospectus is where management gives you the business story, audited financials, risk factors, use of proceeds, ownership, dilution, and the mechanics of the offering. Our seven checks turn that document into a decision process. Check one is the business model and use of the proceeds.

Check 1: Business model and use of proceeds

1:33 If you cannot explain how a company makes money in two plain sentences, then you're probably not ready to value it. Identify the customer, the product, the pricing model, the main cost drivers, and the reason a customer would keep buying instead of switching. Then, read the use of proceed section and separate out the primary shares from the secondary shares. Primary shares are sold by the company. That cash can go to growing the business, repaying debt, or just strengthening that balance sheet.

2:05 Secondary shares are sold by the existing owners. So, when those shares are sold, the cash is actually going to the existing shareholders rather than the company. A vague promise to use the money to grow the business or further the business in some way is not automatically bad, but there's less accountability there. The strongest story connects that new capital to a clear economic engine, rather than just a vague promise to grow the business. Check number two is growth quality.

2:32 Fast revenue growth is great, but the source of that growth matters more than the headline percentage.

Check 2: Growth quality

2:40 Look at the last several years of revenue and ask whether growth is accelerating, slowing down, or staying steady as the company gets larger. Then, compare gross margin over the same period. If revenue rises while gross margin compresses severely, the company might be buying growth with discounts, incentives, or expensive service delivery. Study the operating metrics that actually fit the industry, such as customer retention, same-store sales, unit volumes, bookings, or active users.

3:14 Also, be sure to check customer concentration. A company can show beautiful growth while depending on one customer, one channel, or one contract that can disappear. You want to see repeatable demand and improving economics, not growth that's shattered when one pillar breaks.

Check 3: Profitability, cash burn and runway

3:32 Check number three is profitability and cash. Many IPOs are not profitable yet. So, the question is whether losses are shrinking as the business scales or expanding just to keep growth alive. Compare revenue growth with operating margins, operating expenses, and operating cash flow. Then create a consistent version of free cash flow by taking operating cash flow and subtracting capital spending. If free cash flow is negative, estimate the annual cash burn and compare it with the pro forma cash balance after the offering.

4:09 That will give you a rough cash runway that the company has before needing to take out more debt or propose a new offering. Pay special attention to stock-based compensation. Stock-based compensation is non-cash in the period that you're looking at, but it will dilute your ownership over time and make adjusted profit measures look better than the shareholder economics. A credible path to profitability should appear in the numbers. Check four is valuation and dilution.

Check 4: Valuation and dilution

4:39 Never make the mistake of calling an IPO cheap because of the share price being low. Start with the expected price and multiply that price by the fully diluted share count. Count might include existing common shares, preferred shares that convert, options, restricted stock units, warrants, and new shares that were sold in the offering. Then move from equity value to enterprise value by adding the debt and subtracting the cash. For an unprofitable company, compare enterprise value with revenues or gross margins, but only against peers with reasonably similar growth and margins.

5:15 For a profitable company, earnings and free cash flow multiples are generally going to be more useful. Build a base case and a downside case instead of just assuming that the most recent fast growth is going to last forever.

Check 5: Management and governance

5:39 Check five is management and governance, but do not stop at the polished resumes. Think Trevor Milton guys. Look for evidence that the management team has allocated capital well, managed for difficult periods, and been honest when expectations did not match reality. Then inspect the ownership and voting structure. A dual-class structure can actually leave much more voting power to founders as compared to their economic ownership, which leaves little influence for public shareholders.

6:08 Review related party transactions, board independence, executive compensation, and the amount of stock that insiders are selling for the IPO. Generating some liquidity is completely understandable after years of struggling for cash as a private company. Heavy selling by several leaders deserves a clear explanation, especially if the company itself is not raising much money to further their business. Check number six is risk and concentration.

Check 6: Risk and concentration

6:37 Do not misinterpret the risk factors as a legal boilerplate that can be skipped. Search for risks that can actually change revenues, margins, cash needs, or control of the company. That includes dependence on a major customer, supplier, partner, geography, license, or key executive. Look for pending litigation, regulatory exposure, cybersecurity incidents, and disclosed material weaknesses in the financial controls. Quantified risks deserve extra attention.

7:10 If one customer provides 25% of overall revenue, or a supplier is going to be super hard to replace, put that into your downside case. The goal is not to find a risk-free IPO, because that does not exist. It is to know which risks could break your thesis, and whether the price actually compensates you for taking them. Check number seven is analyzing the deal itself.

Check 7: Float, lockups and selling pressure

7:33 First, compare the shares sold in the IPO with the total number of outstanding shares after the offering. A small public float can make the stock extremely sensitive to demand and exaggerate a day one move. Next, identify selling shareholders and what percentage they are actually selling. Then, read the lockup terms and the section usually called shares eligible for future sale. Many lockups are around 180 days, but the exact timing, exceptions, and early release conditions matter more than the rule of thumb.

8:15 When locked shares become available, the potential supply can increase dramatically. Also, remember that the underwriters may actually support the share price for a limited time after the initial public offering. The first share that you see from an IPO might reflect scarcity and deal mechanics as much as it reflects the business value. Know the share supply before you trust the price action.

Example: scoring a fictional IPO

8:45 Let us apply our framework to a fictional company called Novaroute. Novaroute is growing revenue by 45%, but gross margins actually fell from 62% to 54% year over year, and its largest customer represents 28% of revenue. The company burned through $80 million of free cash flow last year and expects to raise through this IPO $240 million. That is roughly 3 years of runway if the cash burn rate does not improve. At the expected IPO price, Novaroute would trade for about 12 times forward sales, while comparable companies trade for around seven times forward sales.

9:26 Existing shareholders are selling one quarter of the offered shares, and the founder actually gets 10 votes for every share held by the public. This is not an automatic rejection, but the falling margin, cut concentration, premium valuation, insider liquidity, and voting control mean the price leaves little room for mistakes. My decision for no route would be to honestly keep it on a watch list, wait for that price to most likely come down if I'm just keeping the company.

9:56 One more warning about opening day.

Why a first-day pop proves nothing

9:58 A large first day gain does not prove that the company was undervalued. And [snorts] a losing first day does not automatically prove that the company has a bad business. The early share price can be determined by limited share float, allocation decisions, market sentiment, flipping restrictions, and temporary underwriter support. That is why patience can be an advantage for individual investors. You may learn more from the first earnings report, the first publicly filed 10-Q.

10:30 You do not have to own every exciting story at the first publicly available price. Waiting for better evidence or a better valuation is a valid investment decision. Here is a simple scorecard that you can use.

The 7-check IPO scorecard

10:42 Give the company zero, one, or two points for each of the seven checks that we discussed. A score from 11 to 14 justifies further research. A score from seven to 10 means that you should be able to understand and explain the weak areas before you put your hard-earned dollars into that investment. A score from zero to six is usually going to be a hard pass, unless of course the price gets cheap enough. So, throw on your watch list, see what happens.

11:10 The score is not a buy signal necessarily, and these are not laws of finance. The purpose of the scorecard is to stop one exciting feature, maybe like fast growth or a famous charismatic founder, from drowning out the rest of the evidence.

Where to find the filings

11:25 Start with the filing trail. Most US IPOs begin with a registration statement called an S-1, followed by amended registration statement. After the deal is priced, the company will usually file a final prospectus. This is going to show the share price and the number of outstanding shares. Always pull the newest and final version because the business risks and terms of the deal can change throughout the process. And remember what SEC review does not mean.

11:53 The SEC checks for compliance with disclosure requirements. It is not an endorsement of the company, and it does not mean that the IPO necessarily would be a good investment. Then compare the IPO with public peers using the public peers' filings.

The full process, one more time

12:07 Here's the full process one more time. Understand the business and where the IPO cash goes. Test the quality of growth. Measure profitability, cash burn, and cash runway. Value the whole company with a fully diluted share count. Study management, governance, risk, concentration, float, and lockups. If all seven pieces support the same thesis, and valuation leaves some room for mistakes for less than perfect execution, then that IPO probably deserves some deeper research.

12:38 If the opening day excitement is the strongest part of the bull case, I'd say you should probably wait. Tell me which upcoming or recent IPO you would like analyzed with this framework, and I'll make it happen. If this helped, consider subscribing to 9 to 5 investing for more practical stock analysis. And if you would like to learn about a dynamic that can make stocks explode, then check out this video right here. Thank you for watching. I really appreciate your support on this channel.