Is Marin Software The Next 'Hot IPO'?

| About: Marin Software (MRIN)

It’s a Wall Street fact of life: Initial public offerings (IPOs) follow the broader market. During downturns, IPO activity stalls out. And during rallies, activity heats up. Right on cue, the rip-roaring start to the year for stocks is inspiring an IPO boomlet…

Case in point: Last week was the most active week for IPO filings all year. Six new companies filed plans to go public with the SEC. That’s just one shy of matching the total number of filings for all of January. Granted, not every IPO is destined for greatness. But there’s one company in the latest crop of filings that warrants your immediate attention. And here’s why…

Advertising Ultimately Follows Eyeballs…

And eyeballs have certainly shifted away from PCs and TVs to smartphones and tablets in a major way. Consider that the average American now spends 127 minutes per day on mobile devices, up 98% since 2010. Sure enough, mobile ad spending is ramping up, too.

Venture capital firm, Kleiner Perkins Caufield & Byers, estimates that mobile advertising could top $20 billion by 2015. In comparison, last year the total market size checked in at just $3.2 billion, according to IAB. So any way you slice it, we’re in store for hefty double-digit growth ahead.

Eyeballs aren’t enough, though. Just because consumers are spending more time with their smartphones and tablets doesn’t mean that companies are going to spend recklessly on mobile advertising.

They’re going to want to track their spending closely in order to optimize results. And that’s where Marin Software (NYSE:MRIN) comes in…

Founded in 2006, the company provides a leading cloud-based digital advertising platform to help companies “effectively manage their digital advertising spending across search, display, social and mobile advertising channels.”

Put simply, its software allows customers to measure and understand which advertisements are producing the best marketing results. And as mobile advertising continues to ramp up, what company won’t want on-demand access to that type of intelligence?

The question is, however, does Marin’s forthcoming IPO represent a compelling investment? Well, that depends on how it stacks up against the five hallmarks of a hot IPO that we previously identified.

So let’s find out…

Hot IPO Hallmark #1: Age

The first hallmark is all about staying power.

You see, the older and more established a company is when it goes public, the better the stock tends to perform. Logically, it makes sense. Being able to stay in business proves that the company’s product isn’t some “flash in the pan” phenomenon.

As a rule of thumb, I routinely shun any companies with less than five years of operating history. Based on that, Marin Software passes muster, as it’s entering its seventh year in existence.

Hot IPO Hallmark #2: Verifiable Growth Opportunity

When you invest in an IPO, you’re making a bet on the future growth of a company. So not only should it be growing now, but it should also be positioned to keep growing down the road.

For Marin, that’s certainly not a problem.

The company has increased sales for 14 consecutive quarters (and counting). Given the multi-billion-dollar size of the mobile advertising market, I’d say there’s still plenty more growth potential ahead, too.

Hot IPO Hallmark #3: Revenue

University of Florida professor, Jay Ritter, makes this hallmark cut and dry. He found that shares of companies with more than $50 million in sales before they go public perform best in the aftermarket.

Companies either meet that requirement, or they don’t.

Marin officially makes the cut. Over the last 12 months, the company generated $53.9 million in sales. By the time it goes public, that number should be even higher.

Hot IPO Hallmark #4: Profitability

History is instructive when it comes to IPOs, in that roughly 70% to 80% of companies that went public and flopped during the dot-com period were unprofitable.

Keep in mind, that doesn’t mean we should ignore unprofitable companies altogether. It simply means we should give preference to companies that are already profitable and boast a clear path to profitability in the future. When it comes to the mobile advertising space, though, virtually no company has turned a profit yet (it’s still a very young industry). And Marin is no exception.

So the key thing to focus on here is the trend in losses.

Unfortunately, they’re increasing - up 48% over the first nine months of 2012. But the spike can be largely attributed to a 63% increase in sales and marketing costs. In other words, the company is aggressively ramping up spending to secure future sales.

So instead of dismissing the company outright, I’d be on the lookout for an update to the IPO filing with fourth quarter results. That way, we’ll see if the increased spending does, indeed, translate into higher sales - and, in turn, fewer losses.

Hot IPO Hallmark #5: Valuation

As Warren Buffett famously said, “Price is what you pay. Value is what you get.” And when it comes to IPOs, we never want to overpay for growth. At this point, it’s hard to determine a fair value range for Marin because the underwriters haven’t revealed the expected pricing range for the IPO yet. We can’t even establish a rough estimate since its most direct competitors, such as Acquisio Inc., are privately held.

Bottom line: We’ll have to wait until Marin updates its results and finalizes its IPO plans before we can determine whether the stock is poised to be a top performer.