A startup company in a much-watched corner of the technology market goes public and the excitement surrounding the deal is so great that in the first day of trading, the stock rockets 63 percent higher. And on the same day, a second startup technology company makes its own IPO debut, and sees its share price soar 79 percent. Quick: What year is it?
If you figured that it has to be 1999, you’re wrong. Meet Tableau Software (NYSE: DATA), the 63 percent pop, and Marketo (NASDAQ: MKTO), responsible for that impressive 79 percent first-day gain, both of which went public last Friday, and both of which have outperformed the S&P 500 index since. Does this mean that the IPO market has come back to life?
Well, maybe. While the IPO market isn’t as fluffy and risky as that of 1999, though – good heavens, Tableau actually generates profits! –investing in new public offerings still relies on investors’ willingness to add risk to their portfolio in anticipation of future growth. That, in turn, means that those investors need to be reasonably confident that there is some upside ahead that isn’t already priced into the stock.
The bad news? Some of the better-known IPOs of 2013 – Fairway (NASDAQ: FWM), Boise Cascade (NYSE: BCC), Zoetis (NYSE: ZTS) – are already sitting atop healthy gains. Others, companies, like Tableau and Marketo, that occupy particularly intriguing market segments, have experienced pops that make them look pricey to an investor who wants to balance growth with a reasonable valuation.
Is Tableau, for instance, worth double the price that its underwriters had established as a midpoint during the marketing process? The IPO was finally priced at $31 a share, or four times the average ratio among S&P 500 companies of the enterprise valuation relative to its forecast revenue. Can Tableau deliver the kind of growth to justify this?
It’s not impossible. What Tableau promises to do is to make life easier for its corporate customers: Using Tableau’s data visualization software, a company like Sears (NASDAQ: SHLD) might be able to decide how to adjust its inventory or its pricing in response to fast-moving trends. As the amount of data with which companies must wrestle expands exponentially, Tableau can profit by providing solutions to overwhelmed corporate executives, especially when the latter are under pressure to cut costs and maximize revenue. Even if the economy doesn’t grow, a company like Tableau can still prosper.
That, in turn, is the key to investors pondering the IPO pipeline and the growing list of companies that have taken advantage of this year’s bull market to go public. While the first quarter was a relatively slow one, the second quarter is on track to make 2013 a robust year for IPOs. As of May 22, Thomson Reuters reports that there had been 73 IPOs generating $18.36 billion in proceeds so far this year. That compares to $12.6 billion in 69 transactions (removing Facebook’s mammoth IPO from the data) in the same period last year.
In terms of proceeds, the IPO market has been better so far this year than any year in the last decade, other than 2011 (again, without Facebook). Looking at the number of transactions, this year is second only to 2008. And the pipeline is full: Tableau and Marketo were only two of seven companies to go public last week. Another five have priced so far this week.
A quick look at the IPOs that have hit the market this week serves as a reminder to investors to not assume that any and every IPO is likely to pop. Drug company Alcobra (NASDAQ: ADHD); Constellium (NYSE: CSTM), a manufacturer of aluminum products; and Global Brass and Copper Holdings (NYSE: BRSS), which, as its name suggests, produces items made of brass and copper, all priced below the suggested range, traded lower in their debut – or both.
While the broad market spent much of Thursday in the red, two of the five stocks making their debuts did manage to advance: ChannelAdvisor (NYSE: ECOM), another of those companies that is part of a hot trend (in this case, the cloud: the company develops and markets e-commerce software), has blue-chip backing from Goldman Sachs, joint bookrunner, and ended up pricing its deal at $14 a share only to see it climb 32 percent in the first day of trading. Then there is Ply Gem Holdings (NYSE: PGEM), which makes siding for houses, and offers investors a new way to play the recovery of the housing industry. It priced slightly above the target range, at $21 a share, and promptly bounced above $23.
These moves suggest that even as the IPO market seems to strengthen, it is bifurcating. So, as usual, investors looking to tackle the IPO market should approach it with great caution. Be particularly careful of companies like Zoetis that may be priced at a premium simply because it is the only pure play in a particular industry, or like Fairway Market, with only its strong brand name to help it stand out in and compete in an increasingly crowded market. Growth-hungry investors may chase such stocks higher, but the vast majority of IPOs aren’t great candidates for pursuing as their prices rise, unless it is with money that you can afford to lose.