Seeking Alpha
Long/short equity, special situations, momentum, event-driven
Profile| Send Message| ()  

Endurance International Group Holdings, Inc (EIGI), a provider of various cloud-based solutions for small- and medium-sized businesses, plans to raise $351 million in its upcoming IPO. The Burlington, Massachusetts-based firm is expected to offer 23.4 million shares on October 25 at an expected price range of $14.00-$16.00. If the offering reaches the midpoint of that range at $15.00 per share, EIGI will command a market value of $1.9 billion.

EIGI filed on September 9, 2013.
Joint Bookrunners: Goldman Sachs (GS), Credit Suisse, Morgan Stanley
Co-Managers: Cowen & Co, Jefferies & Co., Lazard Capital Markets, Wells Fargo Securities

SUMMARY
Founded in 1997, EIGI offers small- and medium-sized businesses over 150 products and services oriented towards helping their business grow; these include initial website design and email and commerce solutions for companies that are taking the first steps towards an online presence along with more advanced solutions that include scalable and on-demand computing, security, storage and bandwidth, online marketing, and more. The firm currently boasts over 3.4 million subscribers worldwide.

VALUATION
EIGI offers the following figures in its S-1 balance sheet for the six months ending June 30, 2013:
Revenue: $250,963,000
Net Loss: ($64,686,000)
Total Assets: $1,515,082,000
Current and Long Term Debt: $1,134,000,000
Total Stockholders' Equity: $6,208,000

EIGI has experienced extremely rapid growth over the course of the past three years, with revenues increasing from $87.8 million to $292.2 million-an impressive compounded annual growth rate of 82%. However, net losses grew over the same period from a loss of $44.3 million to $139.3 million.

CONCLUSION
Despite the firm's massive losses in recent years, we believe that EIGI is a promising IPO for an initial one day pop above the initial price set by the underwriters. We rate the company a buy in the proposed range of $14 to $16.

We strongly believe that we are currently in a bullish IPO environment where a technology cloud based company with Goldman Sachs as the lead underwriter will most likely trade up to the clouds. However, the long term performance of this stock will ultimately be based of how the company does making profits for its shareholders.

EIGI's focus on small businesses should pay off handsomely as the costs of online commerce continues to decrease and small businesses become increasingly integrated into the online global economy. The firm's financial position certainly introduces an element of risk to buying EIGI, but the firm's upside justifies serious consideration of its stock.

BUSINESS
EIGI's diverse product offerings mean that it faces competition from several different types of firms, including domain name registrars, shared hosting providers, security offerings, marketing and SEO firms, and productivity tools firms. Some competitors are much better capitalized and have more resources available than EIGI. Major competitors run the gamut from Microsoft (MSFT) and Google (GOOG) to GoDaddy.com and Justhost.com.

The large liabilities on EIGI's balance sheet are a significant cause for concern for potential EIGI investors; the firm has over $1.1 billion in debt, more than twice its annual revenue. Though the proceeds of the IPO will help pay off a portion of outstanding debt, the firm will remain deeply indebted and will have to spend much of its profits on debt service in coming years.

MANAGEMENT and MAJOR CURRENT SHAREHOLDERS
President and CEO Hari Ravichandran is the founder of EIGI and has held various executive and strategic positions with the firm since its inception; he took the title of President in 2009 and became CEO in 2011. Mr. Ravichandran's compensation should be closely considered by potential EIGI investors; despite the firm's growing losses, Mr. Ravichandran received total compensation of $9.6 million in 2012, mainly through stock awards.

It is also interesting to note that the two major shareholders besides the President and CEO are Goldman Sachs and Warburg Pincus who together own over 80% of the company pre-IPO. This ownership stake should motivate Goldman Sachs to work diligently to get this IPO safely up into the clouds.

Source: Goldman Should Take The Endurance IPO Up To The Clouds

Additional disclosure: This article was partially based of the company's S-1 filed with the SEC. Potential investors should read the S-1 and review it with their financial adviser before making any investment decisions.