Gigamon: Of All Cloud-Based Public Offerings, This One Provides The Best Relative Value

| About: Gigamon, Inc. (GIMO)

Gigamon (NYSE:GIMO) made its public debut on Wednesday, June the 12th. Shares of the developer of innovative solutions to measure traffic on networks in an intelligent manner ended their first trading day with gains of 49.9% at $28.47 per share.

After witnessing a very solid opening day, shares are a speculative buy as the company is already profitable and is accelerating its revenue growth.

The Public Offering

Gigamon, which was founded back in 2004, has its Traffic Visibility Fabric, a platform which enables advanced levels of visibility, modification and control of network traffic. The company's solutions allow IT firms to optimally forward traffic from network and servers into its tools for optimal use of their respective functions.

All this should help companies in optimizing reliability, execution, performance and cost effectiveness of their entire operations.

Gigamon sold 6.75 million shares for $19 a piece. The company itself sold 4.5 million shares, thereby raising $85.5 million in gross proceeds for the firm. Selling shareholders offered another 2.25 million shares.

The public offering values the equity of the firm at $561 million. The offering took place right at the middle of the preliminary $18-$20 offer range. Some 23% of the total shares outstanding were offered in the public offering. At Wednesday's closing price of $28.47 per share, the firm is valued around $841 million.

The major banks that brought the company public were Goldman Sachs (NYSE:GS), Credit Suisse (NYSE:CS), Bank of America/Merrill Lynch (NYSE:BAC), Barclays (NYSE:BCS) and Raymond James.


Gigamon's solutions are focused to serve organizations in a rapid changing environment. Virtualization, cloud computing, big data and flexible networks are changing how consumers, workers and businesses operate.

Gigamon's offerings increase the visibility and control of these network flows and offer intelligence to better manage, secure and improve these networks. Gigamon's sells its services through its own sales force and its channel partners. At the end of the first quarter Gigamon served over 1,000 end users including 60 of the Fortune top 100 companies.

For the year of 2012, Gigamon increased its annual revenues by 42.0% to $96.7 million. At the same time, net earnings fell by almost 65% to $3.6 million. At least the firm is profitable unlike many of the recent hot cloud initial public offerings.

Revenue growth for the first quarter of 2013 accelerated to 54.5% as revenues came in at $25.8 million. The company reported a $1.2 million quarterly loss compared to $0.9 million last year.

Gigamon ended its first quarter of 2013 with $22.7 million in cash and equivalents and operates without the assumption of debt. Factoring in the $85.5 million in gross proceeds, the firm will operate with roughly $100 million in net cash.

Gigamon plans to use $18.9 million of the proceeds to pay out performance payments to its employees, leaving the firm with a net cash position of $80 million. This values operating assets at around $760 million.

Based on Wednesday's closing prices, the market values Gigamon's operating assets at 7.8 times annual revenues and over 200 times last year's annual earnings.

Investment Thesis

As noted above, the offering of Gigamon has been quite a success. While shares were offered at the midpoint of the preliminary offering range, they saw very healthy opening day returns.

Clearly Gigamon operates in a rapidly evolving industry which brings some risks to this offering. The network traffic visibility market is relatively new and unpredictable. On top of that, competitors like Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR) have shown an interest as well.

The company is furthermore dependent upon its single product family comprised out of GigaVUE, GigaSECURE, GigaSMART and GigaTAP, leaving it vulnerable to innovation or superior offerings from competing firms. Like any growth firm, Gigamon has the challenge to grow its organization at this rapid pace as well.

Gigamon is benefiting from excellent timing and a red hot IPO market especially for cloud-related names given the recent success of the public offering of Marketo (NASDAQ:MKTO) and Textura (NYSE:TXTR).

Despite selling interest from Highland Capital Partners, the venture capital firm which sold 450,000 shares in the offering, incentives are still highly aligned. Highland holds some 26% of the shares outstanding following the public offering.

Unlike many other fast growing technology names, Gigamon is actually already generating profits. This is despite spending 18 cents on each dollar of revenues on research and development as gross margins topped at 79% over the past year. Interesting as well is that the company spent 48% of its revenues on sales and marketing efforts, which has actually boosted the first quarter revenue growth rate to 54.5%.

While the valuation seems really expensive on traditional valuation multiples, relative valuations appear quite in check even after Wednesday's 50% return. Valued at around 8 times annual revenues, the valuation seems somewhat fair given the growth rates which surpass 50% per annum.

Relative to all the "expensive" recent public cloud-based offerings, Gigamon seems relatively cheap as the company is reporting accelerating growth rates and generating GAAP earnings.

Shares are a speculative buy in the coming weeks as investors could ride the post-IPO wave, given that the general market sentiment remains solid.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.