As markets trade higher to start off the week, underwriters for the new LogMeIn IPO are likely drumming up interest in the latest offering to hit Wall Street. The IPO market has been relatively slow over the past year as the bear market has reduced the amount of liquidity and made such offerings very difficult. But the spring rally has made it possible for several new stock offerings to come to market helping companies raise much needed cash for their businesses.
On the block for a possible offering this week is LogMeIn, Inc. (LOGM) which is the primary provider of on-demand remote-connectivity solutions to small and medium sized businesses as well as individual consumers. Essentially the technology allows users to log onto their home or office computers from any web browser, making sure that all data is easily accessible and yet still providing for secure connections in order to protect sensitive information. There are several tiers of service offered including a basic free service all the way up to deluxe premium products. As of March 31, the company boasted 188,000 premium accounts and continues to grow their subscriber base very quickly.
The LogMeIn IPO is expected to raise about $67 million for the company, assuming the stock prices in the middle of the $14 to $16 expected range. In addition to the 5 million shares being sold by the company, an additional 1,666,667 shares will be sold by existing shareholders which largely include private venture capital firms as well as company executives. At this point it looks like the executives are selling a reasonably small portion of their holdings, which helps investors maintain confidence that the executives have an incentive to continue to grow the business.
While the remote-connectivity concept is very useful and popular (especially for road warriors and those of us with dual home / business offices), only recently has LogMeIn been able to capitalize on its success and post a profit. Looking into the financial statements, it is amazing to see how much money the company spends on sales and marketing. In 2006, the company spent 88 cents in marketing expenses for every dollar received in revenue. But the efforts appear to have paid off with revenue growing by 139% in 2007, 91% in 2008, and 73% in the first quarter of 2009. As revenues have caught up with high fixed costs, the company is inching closer to profitability with the first quarter actually posting pro-forma EPS of 0.10.
Although the growth is impressive, the price tag on the LogMeIn IPO may be a bit excessive. Analyst expectations are still hard to come by, but annualizing the first quarter numbers, it is likely the company will earn 40 to 60 cents in 2009. With the stock price likely to start near $15, the PE will be roughly 30. When the market is healthy, multiples of 30 on growth stocks are commonplace and often expand to much higher levels. But in an environment where consumer and business spending is constrained, it is likely that this multiple could prove a bit dangerous.
The company has relatively little debt, so the threat of default is not an issue for investors. However, the expanded advertising budget could quickly burn through new cash if corresponding revenue does not continue to flow. The technology sector is highly competitive and LogMeIn believes that it will face threats from similar services in the coming quarters. There is no guarantee that the company will be able to maintain its leadership in this niche business, especially with companies like Citrix Systems, Inc. (CTXS) and and Cisco Systems, Inc. (CSCO) using deep pockets to develop and promote similar products.
The lead underwriters who handle the LogMeIn IPO are set to be JP Morgan and Barclays Capital, which are relatively well respected firms. Thomas Weisel Partners, Piper Jaffray, and RBC Capital Markets are also on the deal ensuring that there will be a relatively wide distribution for the new stock offering. With the market starting out higher this week, I wouldn’t be surprised to see the deal come at or above the high end of the range ($16 or above) and possibly trade up from that level on the initial deal hype. These underwriters often do a good job of creating a perceived shortage of stock on the deal which can lead to more buying pressure on the day the IPO is launched. But once the hype wears off in the following few days, LOGM will likely be vulnerable to a quick negative move. At that point, any additional weakness in consumer spending or in the broad markets could push the stock down to the low teens or even single digits.
So while the LogMeIn IPO may generate some near-term buzz and help to develop confidence in market liquidity, the deal appears a bit dangerous and I would not recommend holding deal stock beyond the first few days of trading.
Disclosure Author does not have any positions in LOGM and does not have immediate plans to participate in the deal.