The IPO market is really beginning to catch fire with the tech industry partying like it’s 1999. The party lights glowed and the DJ began spinning the beats before the LinkedIn (LNKD) IPO a couple weeks ago and the party will continue reaching a feverish pitch with a Groupon (GRPN) IPO. I mentioned in my blog post about the LinkedIn IPO that others would soon follow (particularly Groupon, Facebook and possibly Twitter) on the heels of the massive success of LinkedIn and that appears to be happening. Groupon announced today that it has filed for an IPO and hopes to raise $750 million. If the LinkedIn deal is any indication, the Chicago based daily deal company could raise well north of $1 billion in an IPO.
Ok, maybe the title hints that there is going to be some secret underground tactic for how to trade the LinkedIn (LNKD) IPO, but the truth is that my secret underground tactic works for all IPO’s! Ha! It’s not the first time I’ve revealed my strategy for trading IPO’s, but considering the biggest IPO since Google began trading today (aka the Facebook of business networking), I thought it might be a good time to revisit the tactic.
When an IPO like this hits the market the knee jerk reaction is to want to jump in as soon as it begins trading for fear of missing out on the next big thing. Taking a look at the open today with the stock more than doubling in price and surpassing $100, it definitely appears “the fear of missing out” trade is on big time! Jumping in on that kind of trade can be a big mistake and can often lead to large losses.
Before I get into the trading tactics let’s take a look at why LinkedIn (LNKD) is generating such buzz. First of all, it’s the highest profile social networking site to hit the market which in all likelihood will have Facebook and Groupon wondering whether they should hit the public market sooner rather than later. I’m sure investors and execs at both companies are seeing the dollar signs. LinkedIn is no slouch in the social networking world, but is still dwarfed by Facebook in terms of number of users, revenue and profit. It’s dwarfed in terms of valuation too. Based on the secondary market, Facebook has now reached a stratospheric valuation of around $70 billion while Groupon is being valued in the $15 – $20 billion range. I believe at the current price, LinkedIn is approaching a $7 billion valuation.
LinkedIn counts just over 100 million users and doubled revenues in 2010 over 2009 to $243 million with a net income of $15.4 million. However, the company says it does not expect to be profitable on a GAAP basis for 2011 and is forecasting declining revenues and rising costs going forward (according to Reuters). For comparison sake, Facebook has more than 600 million users and reportedly earned $1.2 billion in revenue and $355 million in net income for the first nine months of 2010. Now you begin to see the kind of frenzy a Facebook IPO would generate if it were to go public too.
Many are beginning to question LinkedIn’s valuation as murmurs of another tech bubble begin to grow. Shares were priced at 17.5 times the company’s 2010 sales (that’s BEFORE today’s parabolic move). That compares with Google’s valuation of about six times. Is the move justified for a company that doesn’t expect GAAP profits this year or for a company that TheStreet.com says is becoming far less useful? Common sense would say absolutely not, but then again any of us who have been involved in the markets for some time knows that common sense and reality are often two sides of the coin. The “fear of missing out” trade can go on longer than we think. Does that mean you should jump on the bandwagon? In my humble opinion – NO.
That leads me to a discussion of how best to trade IPO’s, particularly an IPO that has soared out of the gates. In a nutshell, the best strategy is to WAIT. You want to see where this thing settles out, or more technically, where it forms its first base… a bullish triangle, a short base, a longer cup with handle or double bottom base. The hottest IPO’s often don’t base very long, but in my experience it’s best to wait at least two weeks from the open to get a feel of where resistance and support may be. After two weeks, I’ll revisit the LinkedIn IPO and post a chart with my analysis along with examples from the past. Good trading out there and do not chase this IPO!
According to the WSJ, investment bankers are beginning to discuss proposals with Groupon for an IPO. Should Groupon go public this year it would likely be the most talked about IPO of the year (assuming Facebook holds off for another year). Groupon already turned down a $6 billion offer from Google which in my opinion was a big mistake but some value the company now at $15 billion so what do I know. It’s a great business model but with a low barrier to entry and I think Google will begin making a much bigger push in this space and have the infrastructure in place to do so. The company was rumored to be looking at an IPO in the fall, but is now looking like it could happen within a couple months. Considering the company just raised nearly $1 billion from big investors, there probably isn’t a need to rush an IPO, but at the same time the IPO environment is strong which may not be the case later this year. Anyone smell a bubble? Facebook $50 billion valuation, Groupon $15 billion, Twitter nearly $4 billion…
It’s been a terrific year for IPO’s here in 2010 with a surge in high quality companies coming to market. A couple months ago I highlighted the Top 5 IPO’s, all of which are up significantly since being highlighted. I’ll probably do another Top 5 list in a month or so to include IPO’s since that report was written, but for now I wanted to highlight one IPO that I found to be very compelling – Sodastream (SODA).
Sodastream is an Israeli company that sells home carbonation and flavoring systems for.. you guessed it! Homemade soda and sparkling water. While I haven’t used the product myself, the idea is brilliant and rides the wave of three important trends – an increasing awareness of the need for better nutrition, a cleaner environment and saving money (in the long run). Three simple, but powerful trends.
We’re more than half way through 2010 and this year has seen a significant pickup in the number of quality IPO’s, so I thought I’d rank the top 10 up to this point in the year based on fundamentals. Part I will highlight the first five, part II the next five and I’ll follow that up with a report taking a look at some of the most promising IPO’s that may begin trading in the last quarter.
Camelot Info Systems (CIS): This is the highest rated IPO that I currently track with a fundamental score of 29/30. The company provides enterprise application services and financial industry information technology (IT) services in China. It’s the largest provider of enterprise resource planning in China and names HP, Accenture and IBM as customers.
Camelot has posted significant growth every year it’s been in business and that growth continues today despite a shaky world economy. In 2009, they experienced EPS growth of 60% and is posting record growth again this year with an estimated 113% growth for 2010. Revenue growth has accelerated in each of the past four quarters.
Technically, the stock remains extremely bullish, but very overbought in the shorter term. After a month long flat base formation, the stock exploded higher Aug 18th and hasn’t looked back. It’s up nearly 50% in under two weeks and buy volume continues to come in above average. It’s best to look for a retracement of about 50% from the breakout point above $11, so a return to the $12 – 13 area would provide an ideal entry point.
Several days ago I posted what I thought were the top 5 IPO’s of 2009 and in this report I round it out with the next 5 best IPO’s of 2009. Please note that these are not ranked solely on performance, but rather on fundamentals such as earnings and sales growth, ROE and margins. No, this is not an extremely scientific ranking. You data junkies can crunch the numbers and run through your algorithms elsewhere 🙂
6. Shanda Games (GAME): This was one of the big IPO’s from last week, but didn’t perform as well as A123 Systems (AONE) out of the gates. After opening at $13, it sold off the rest of the day and closed below $11. Considering the run that the China gaming stocks have had, I think this IPO at this stage potentially marks a top in this sector. That’s not to say the growth won’t continue, it’s just that they have gotten ahead of themselves a bit.
Shanda Games is a spinoff of Shanda Interactive (SNDA). Certainly, the success of the Changyou.com (CYOU) spinoff from Sohu.com (SOHU) had something to do with the IPO. With the overall market risk appetite increasing and gaming stocks on fire, it makes sense. Shanda Games contributes 95% of the revenue of Shanda Interactive and the bulk of that revenue is concentrated in just two games. Still, that’s less of a risk than Changyou.com (CYOU), which gets most of its revenue from just one game. Shanda Games profits nearly doubled in 2008 over 2007 and the company is on pace to come close to that again here in 2009. Get more GAME analysis here.
7. Logmein (LOGM): Logmein provides remote access software enabling you to access your computer from anywhere. You can even access your desktop from your iPhone. Cool stuff! This is a small company that really started seeing some growth towards the end of 2007 and is expected to turn its first yearly profit here in 2009. Quarter over quarter revenue growth over the last 4 quarters has been impressive at 99%, 86%, 73% and 58% while EPS growth has come in at 108%, 150%, 200% and 289%. Growth is expected to moderate in 2010, but this remains a company to keep on the radar. Technically, it’s in the process of carving out its first base which may end up as a cup with handle. Get more LOGM analysis here.
8. Rosetta Stone (RST): Many people are familiar with this software company that makes learning a foreign language much easier. The company rolled out a high profile ad campaign during the Summer Olympics last year featuring Michael Phelps. Smart move because it helped generate awareness of the company ahead of the IPO less than a year later. While the stock has had a tough time gaining traction since the IPO launch on April 16th, and took a hit after lowering guidance about a month ago, this is still a company experiencing impressive growth. After stumbling in 2006 with a loss, it has bounced back in a big way, returning to profitability in 2007 and posting record profits last year. Here in 2009, the company is expected to grow EPS by another 40%. It’s going to be at least several weeks before the technical damage is repaired, but this is one company that must be on the radar. Get more RST analysis here.
9. Tri-Tech Holding (TRIT): In the first top 5 IPO report, I highlighted Duoyuan Global Water (DGW) as a top play on China water scarcity. I think Tri-Tech Holdings is a darn good play as well. The company develops and implements systems (both hardware and software) to assist government entities in monitoring and managing water supplies. It’s a very small company and a fraction of the size of Duoyuan, but the growth and profit potential is just as great, if not greater in my opinion. The stock has already doubled in price following the IPO on September 10th and I don’t think it’s done. I’m looking for one of two things for an entry – one entry would be on a filling of the gap just below 12 and another entry would be a breakout from the first consolidation period of at least two weeks. Get more TRIT analysis here.
5. Lihua International (LIWA): Rounding out my top 10 IPO’s of 2009 list is another Chinese company which also IPO’d in September. Lihua is relatively off the IPO radar of most and that’s just the way I like it. The stock has also doubled in price following the IPO and has yet to digest gains. I think a breakout from the first consolidation period of at least two weeks offers an entry point.
Lihua makes copper wire for a variety of industries including automotive, electronics and telecom. A great pick and shovel play on China’s continued growth. While growth hasn’t been as spectacular as some China companies and the company can be inconsistent at times, the overall growth is very strong. The company posted EPS growth of 72% in 2007, 38% last year and is on pace for growth of around 25% here in 2009. Get more LIWA analysis here.
Honorable Mention: NIVS Intellimedia (NIV), Opentable (OPEN), Medidata Solutions (MDSO)
Disclaimer: I don’t own any of the stocks mentioned above.
The first half of 2009 brought us some memorable IPO’s, but for the most part is was forgettable. As we approach the final quarter of the year with a flurry of IPO’s expected to price in the coming days, I thought I’d rank what I think are the top IPO’s of 2009. Please note that these are not ranked solely on performance, but rather on fundamentals such as earnings and sales growth, ROE and margins. No, this is not an extremely scientific ranking. You data junkies can crunch the numbers and run through your algorithms elsewhere 🙂
1. Bridgepoint Education (BPI): Since turning its first yearly profit in 2007, this provider of online education to over 30K students has been on a tear. In 2008, its EPS rocketed to .51/share vs just .06/share the year before and here in 2009 it’s expected to double to a little over a buck a share. Sales growth has been equally impressive with quarter over quarter growth in the last 4 quarters of 183%, 175%, 163% and 127%. Technically, it’s in the process of carving out a new base after more than doubling from opening day. Get more BPI analysis here.
2. Changyou.com (CYOU): Sohu.com (SOHU) spinoff Changyou.com probably carries more risk than most of the IPO’s coming to market in 2009 because more than 90% of its revenue comes from one online game – the martial arts game Tian Long Ba Bu. Ah, but with risk comes considerable reward and CYOU hasn’t disappointed. It too has more than doubled since opening day and is now in the process of carving out a new base. Growth really ramped up in 2008 following the launch of Tian Long in May of 07, vaulting from an EPS of .10 in 2007 to 2.16 in 2008. That growth has been tailing off quite a bit, but remains strong. Quarter over quarter EPS growth in the past 4 quarters was 999%, 200%, 97% and 19% last quarter. The company hopes to get the growth going again with some new games which it has in the pipeline. Get more CYOU analysis here.
3. Solarwinds (SWI): No, this isn’t a solar company. Indeed, it’s a strange name for a company that provides network management software, but it certainly hasn’t stunted the growth of this Austin, Texas company. This is a company that has been around for more than 10 years and boasts more than 80K customers. After stumbling a bit in 2006, the company got back on track and has posted an EPS of .21/share in 2007 (400% growth over 2006), .38/share last year and is expected to post an EPS of .56 this year. Technically, this is a stock that has broken out twice this year – the first time above 15.96 on June 29th and then again on Sept 4th from a bullish triangle formation. It’s too extended for entry at this time. Get more SWI analysis here.
4. Duoyuan Global Water (DGW): I think investors would be wise to take a close look at Chinese companies in the water management/treatment/infrastructure areas and DGW has to be one of those. Guo Youzhi, general secretary of the China Desalination Association, has said that only 20 percent of industrial wastewater in the country is efficiently re-utilized and 80 percent is being simply discharged. According to a March 2009 study by China Research and Intelligence, over 70% of Chinese rivers, lakes, and seashores, and 90% of its underground water supply in urban areas are polluted. The lack of clean drinking water and pollution in general could very well stop China’s growth in its tracks but with crisis comes opportunity. Duoyuan EPS growth nearly doubled in 2007 and 2008 and is expected to more than triple this year before flattening out next year. Get more DGW analysis here.
5. Recon Technology (RCON): China + IPO + commodities = hot stock and Recon Technology is no exception. This off the radar China IPO rocketed out of the gates on July 30th, carved out a bullish triangle formation, then broke out on Sept 3rd. It’s up about 50% following that breakout. They provide computer software to mining and petroleum companies in China (which include behemoths CNPC and Sinopec) which aides in extraction. One caveat is that the company is very small with just over $10 million in revenues in the past year. So while growth remains robust, it comes from a small base. It will be interesting to read their earnings report on September 28th. Get more RCON analysis here.
I’ll be back later this week with part deux and another 5 top IPO’s from this year.
The growth in China over the past 10 years or so has been staggering and despite a global economic crisis, the economy is still growing around 6% (so they say). With an attitude of growth at any cost and a mass migration to China cities, you have to assume that water pollution and scarcity could very well choke the economy in the coming years.
Guo Youzhi, general secretary of the China Desalination Association, said that only 20 percent of industrial wastewater in the country is efficiently re-utilized and 80 percent is being simply discharged.
Duoyuan Global Water (DGW) which IPO’s next week aims to alleviate some of the concern. The company distributes its water treatment equipment which includes filtration, water softening, water sediment separation, disinfection and reverse osmosis throughout 28 Chinese provinces. The company is growing quickly with revenues rising 40% and net income jumping 63% over 2007 levels.. The company cites population growth and industrialization as factors that are driving demand for water treatment in the country.
The IPO is expected to price on June 23rd and begin trading the next day on the NYSE under the ticker symbol “DGW”. The company plans to sell 5 million ADRs between $13 – 15/share with the proceeds being used to improve and build new facilities including research facilities as well as create new products.
The IPO market continues to heat up with the Rosetta Stone (RST) IPO pricing tonight at $18, above the expected range of $15 – 17, raising $112.5 million. The relatively small size of the float, combined with a lack of publicly traded competitors allowed the company to command a higher price. It begins trading tomorrow under the ticker RST on the NYSE. Rosetta Stone is a leading provider of technology based learning language instruction solutions that consists of software, online tools and audio/visual tools.
According to the regulatory filing, Rosetta’s revenues rose 52% last year to 209.4 million over 2007. In 2005 the company reported revenues of $48 million, jumping to $90 million in 2006 so this is a company with tremendous growth in the past few years. In 2007 the company moved its headquarters to Arlington, VA, expanded into international markets, hired 60 employees at headquarters and recently began rolling out high profile ads featuring Michael Phelps in preparation for the IPO.