- Care.com is a fast-growing company that has lost nearly 50% of its value following its IPO.
- Care.com will likely follow the same pattern of other dot-com and internet based companies like Groupon, LinkedIn, Zillow, and Angie's List.
- If this pattern continues, Care.com could produce gains in excess of 45%.
Care.com (NYSE:CRCM) was never one of the most hyped dot-com IPOs, but on the day it became a public company, the stock saw gains in excess of 30%. However, those gains have become a distant memory, as shares currently sit more than 45% off their high. Albeit, with growth of nearly 70%, investors have to assume that gains will one day come, but when might that day be?
Care.com: Growth & Efficiency
Care.com is an online marketplace divided by families and caregivers who pay a monthly fee to use the service. Care.com then acts as a middle man to connect nannies, child care providers, senior care providers, pet watchers, special needs professionals, and tutoring to families in need of these services. According to Care.com's S-1 filing, it has nearly 10 million members with a near 50/50 balance of families and care givers, meaning it has a good ratio of supply and demand.
Furthermore, in 2013, total revenue grew 68% year-over-year to $81.5 million. While the company is not yet profitable, its expenses are growing at a slower clip than revenue. Specifically, total expenses increased just 37% last year, and its selling & marketing, which is typically higher in dot-com companies, increased 42%. Hence, this is a good ratio for Care.com to become profitable.
How low will it go?
Care.com was never a Facebook (NASDAQ:FB) or Twitter-like (NYSE:TWTR) company, meaning it didn't have hype surrounding its IPO. Currently, the company is valued at just $500 million, meaning it trades at only six times sales; in comparison to the 20 and 25 times sales for companies like Zillow (NASDAQ:Z) and Yelp (NYSE:YELP). Still, despite Care.com showing value relative to other small and fast-growing dot-coms, it is hard to predict exactly how far it might fall.
With that said, often in the market we can look back at trends of the past to find performance for the present and future. Sometimes, trends will develop that will be copied, and at the very least, a consistent pattern can unveil much about the psychology of investors buying in a specific space. Such is the case in the dot-com space, or those that operate through the web.
To explain, I want to take you back to November 29, 2011,where I published "Groupon Following The Trend Of Past IPOs; Could Post 50% Gains In Near Future." It's in this article where we might find an answer for how much lower Care.com will fall, and how much it will rise once it reverses.
"The Trend" summary
In the 2011 article above, I showed charts for four companies that I considered similar in some way to Groupon (NASDAQ:GRPN). The companies were Renren (NYSE:RENN), LinkedIn (NYSE:LNKD), Pandora (NYSE:P), and Zillow, all of which begun trading in the same 12 month span. My observation was that each stock saw a nice IPO pop, then suddenly and abruptly lost a considerable amount of value. Then, following that lost value, usually in the neighborhood of 50%, each saw a significant recovery similar to what was originally lost. In another article published on March 4, 2012 entitled "Yelp: Determining IPO Trends For Large Gains" I added Angie's List (NASDAQ:ANGI) to the bunch, and included the following chart:
% Fall Following IPO
% Rise Following Fall
As you can see, each of the above companies saw enormous post IPO losses only to recover quickly with enormous gains soon after. It's worth noting that when I published the Groupon IPO article, its stock was trading about 50% off its IPO high. But, in the 10 days following that article, it too returned gains of 54%. Coincidence? I think not! There is too much of a connection with these smaller internet-based companies and the trading tendencies following an IPO. Given this fact, and if this long lasting pattern holds up, Care.com should be getting really close to its rebound after being down more than 40% from its IPO.
Obviously, there's no such thing as a perfect unbeatable system in the market, but in my opinion, this post-IPO performance following a sub-50% loss is about as close as it gets. With that said, I have discussed in various IPO articles that a good time to buy is when the stock reverses and trades 5% to 10% above its post IPO lows, implying that this is a good indication of the recovery. In the past, this has been a good indication to buy. Granted, this doesn't tell us how low a company like Care.com may fall, but following what we've discussed, if it follows the same pattern, we do know that it will be soon, and that investors will have the opportunity to reap these rewards.