May 12th, 2014
Money Morning Article of the Week
8 IPOs That Should Be On Every Investor's Radar in 2014
by Money Morning Staff Reports
Initial Public Offerings are like the car accidents or hockey fights of the investing world; you know you should look away but it's impossible to resist a guilty glance.
They epitomize the emotional nature of investing – a new up and coming company that may be the next Procter & Gamble or Apple coming onto the scene with high hopes and a great idea.
But there are plenty of IPO busts, just ask recent Zynga and Groupon investors.
Sadly the market doesn't operate for long on emotions, unless it's toying with individual investors' emotions to get them to buy something. It's the numbers that matter and hyped launches often turn into costly long-term investments. They can be more like impulse purchases that you regret almost as soon as you buy them.
That's not to say all IPOs should be avoided.
But you have to do more than just listen to the media pundits to know which IPOs are worth your energy, effort – and most importantly money.
And that's what this report is all about. We take a deeper look at the IPO market. You'll see how to evaluate IPOs, the best way to spot the IPO winners (not the headline grabbers), and what IPOs to avoid in the coming weeks and months.
Before we show you the best eight IPOs on the horizon, let's look at the secret to investing in IPOs.
The Road to IPO Riches
Ever since the Dutch East India Company became the first to issue stocks and bonds to the public in 1602, investors have seen initial public offerings (IPOs) as the road to riches.
Think back to the dotcom craze of the late 1990s. You'll remember it spawned a feeding frenzy among investors chasing after internet IPOs on an almost daily basis.
It wasn't long before investors on Main Street took the bait after watching hordes of new college graduates in Silicon Valley become instant millionaires.
But as companies with unproven business models executed massive IPOs with sky-high prices, many investors who succumbed to the siren call got clobbered.
Pets.com for instance, raised $82.5 million in an IPO in February 2000 before imploding nine months later. And EToys.com stock went from a high of $84 per share in 1999 to a low of just 9 cents per share in February 2001.
In both cases, small investors were left holding the bag. The point is IPOs have always been high-risk, high-reward.
Here's what you need to know...
First of all, most companies go public to raise capital, either by issuing debt or stock. After all, being publicly traded opens the door to potentially huge returns for the owners.
But that's not all.
Public companies pay lower interest rates when issuing bonds. They also can issue more stock to grow through mergers and acquisitions.
Then there's the prestige factor, the pure ego satisfaction of hobnobbing with the fat cats on Wall Street.
But from an investor's point of view, the road to prosperity with companies going public is often fraught with peril.
You see, most IPO s leave retail investors completely behind. Typically only the biggest clients with the deepest pockets are going to get in on a hot IPO.
These institutional clients usually have a cozy relationship with one of the underwriters - such as investment banks Goldman Sachs, JPMorgan Chase or Morgan Stanley.
The underwriters work behind the scenes with the company to compile the proper regulatory filings with the Securities & Exchange Commission, handle the paperwork and determine the offering price of the stock.
If the underwriters know the IPO will be in great demand and the price is likely to jump, they'll shower their favorite institutional clients with an allocation at the initial price.
But retail investors can still make money on companies going public. You just have to do your homework.
For instance, Amazon.com (Nasdaq: AMZN) went public on May 15, 1997, with an IPO valuation of $441 million. Today it's $140 billion.
EBay Inc.'s (Nasdaq: EBAY) IPO valuation on Sept 24, 1998 was $2 billion. Today it's $67 billion.
Just remember, don't buy a stock just because it's an IPO. Buy it because it's a great investment. Nearly 99% of the time, the initial success of an initial public offering (IPO) is determined by the firm - or firms - who sponsor it, the offering price, and how early an investor can get in.
And the best time for most investors to buy IPOs is AFTER the initial mania settles down.
This could be weeks or months after the initial offering. The key is to be patient.
There are two reasons these delayed entries into IPOs can be golden for those who jump in at precisely the right time:
- You have a better idea of what the business is... and what its true potential can be.
- The price is usually settled or even deflated, especially after the lock up period expires. This is usually a 90 to 180 day window where insiders or majority shareholders are forbidden from selling their stock.
Now that we've covered the ins and outs of IPOs, we'll show you eight potentially blockbuster IPOs and three to avoid like poison.
Top 8 IPOS to Watch
- Alibaba - China's largest e-commerce company has just filed for what could be the largest technology IPO in history. Alibaba is projected to raise more than $15 billion, and some analysts say it could top Facebook's $16 billion offering. Alibaba is responsible for 80% of online commerce in China. Last November on China's "single's day" shopping spree, this online giant posted a 24-hour record of $5.7 billion in online sales. That was nearly three times the sales of 2013's Cyber Monday in the U.S. Analysts estimate that China's e-commerce market, a $210 billion industry in 2012, will hit $420 billion by 2020. That bodes very well for Alibaba, and Yahoo!, which owns a 24% stake in the company, as swell as Softbank which owns 34% of Alibaba.
- Dropbox - Dropbox is a file hosting service that offers cloud storage, real time file synchronization and client software. It's main purpose is to quickly transfer large amounts of data (movies, pictures, databases, spreadsheets, etc.) quickly and allow multiple users to collaborate, or share in real time. Dropbox allows users to create a special folder which Dropbox then synchronizes so that it appears to be the same folder (with the same contents) regardless of which computer or mobile device is used to view it. Many developers are building software to incorporate this new platform and its potential as a takeover target by Google, Amazon, or Apple is high.
- GoDaddy-GoDaddy is an internet company that helps clients design and build their own websites. The company also offers web-hosting services and domain-name registration. GoDaddy has over 12 million customers worldwide and manages more than 57 million domain names. In 2011, GoDaddy was purchased for $2.25 billion by KKR Co., Silver Lake, and Technology Crossover Ventures. Three years later, the company should reach a much higher valuation in its IPO.
- Glam Media- Glam Media is a vertical-media company with entertainment and lifestyle Websites and blogs mostly geared toward a female demographic. The New York, NY-based company generates revenue through ads and has been profitable since 2010. Glam continues to grow through acquisitions and currently has 356 million unique visitors per month to its site.
- Rapid7 & WhiteHat Security- One or both of these companies could be the next huge cybersecurity play, as both are thought to go public in 2014. Rapid 7 saw its revenue grow by 75% last year and continues to expand its product portfolio. WhiteHat was founded by a former Yahoo! Inc. (Nasdaq: YHOO) information security chief, and dozens of Fortune 500 companies rely on WhiteHat for protection. As the world becomes more complex, uncertain, and digital, expect cybersecurity companies to grow in importance and value. Plus, both of these are prime takeover targets by larger security and defense firms.
- Airbnb- Founded in August 2008, Airbnb is a trusted community marketplace for people to list, discover, and book unique accommodations around the world — online or from a mobile phone. It has served over nine million guests, across 34,000 cities in 192 countries. That includes stays at 600 castles. Whether an apartment for a night, a castle for a week, or a villa for a month, Airbnb connects people to unique travel experiences, at any price point. And with world-class customer service and a growing community of users, Airbnb is the easiest way for people to monetize their extra space and showcase it to an audience of millions. This could be the next wave of the travel business.
- Atlassian- This enterprise software firm helps teams of all sizes track and share everything, work smarter, and create better software together. Tech-research firm Gartner Inc. put Atlassian in its "Leaders" Quadrant of the 2013 "Magic Quadrant for Application Development Life Cycle Management" report. Started in 2002, in Australia, it made it to the US in 2005. Then in 2010, Accel Partners invested $60M in Atlassian. Clients are a “Who's Who” of the tech world, including Facebook, Netflix, eBay, Twitter, Cisco Systems and Hulu, to name just a handful.
3 IPOs to Avoid
All three of these companies present huge risks for investors and should be avoided.
- Pinterest- Pinterest faces even more problems than Facebook in terms of generating profits and revenue from its user base, as well as monetizing mobile users. Pinterest has not identified a profitable business strategy and has even admitted it does not know how to turn its user base into profits. Even though this website has grown incredibly popular, its fate as public company is clouded with uncertainty.
- Ally Financial- Ally is an automotive financial services company based in Detroit, MI. The former subsidiary to General Motors went public on April 10 at $25 a share, trading under the ticker ALLY. Ally was the recipient of a federal government bailout in 2008, and all the shares offered in its recent IPO belonged to the U.S. Department of the Treasury. After its subprime home loans unit nearly destroyed the company in 2008, now it is making subprime auto loans. Investors would be wise to stay far away from Ally.
- Weibo- There is a lot of hype surrounding "China's Twitter," Weibo, as many investors are hoping for the type of gains that "China's Google," Baidu (Nasdaq: BIDU), has produced. But investors should be cautious to equate Weibo to Baidu or even Twitter. That's because whereas Twitter has an instant, uncensored stream of posts, Weibo must make sure each post is government approved. This not only limits the value that Weibo offers, but adds unnecessary costs. Weibo went public on April 21 with a $17 offering and trades under the ticker WB. The stock topped $24 on its first day of trading and has since cooled off. Other than trying to bargain hunt, this is one to avoid. Your hard-earned money should be placed in much better investments.
Editor's Note: We've uncovered the secret behind this year's hottest investment. If you like IPO's, this is a must-see story.