by David Sterman
I've been looking at the 2010 initial public offerings (IPOs) that have doubled in value -- or more -- and found a name poised for even more upside, and another one that now looks vastly overvalued.
Pricing an IPO is tricky. Bankers need to price a deal low enough so it can garner strong demand. But price it too low, and the company will complain that it could have raised a lot more money for the shares offered -- especially if the stock zooms higher in subsequent trading sessions. In the table below, some of these companies were clearly underpriced to start with, while others were able to make a strong impression well after the IPO was completed.
|Company (Ticker)||Recent price||Market cap. ($M)||Post IPO gain||52-week range||2011 P/E||2011 sales growth rate|
|BroadSoft (BSFT)||$35.09||$872||301%||$36.45 to $7.34||62.7||25%|
|Molycorp (MCP)||$51.50||$4,220||271%||$62.80 to 12.10||neg.||101%|
|HiSoft Technologies (HSFT)||$31.94||$908||220%||$33.47 to $9.98||47.7||13%|
|Fabrinet (FN)||$26.95||$910||162%||$27.24 to $9.61||N/A||N/A|
|JinkoSolar (JKS)||$26.67||$581||156%||$41.75 to $8.23||5.2||42%|
|RealPage (RP)||$27.18||$1,810||147%||$34.19 to $12.12||75.5||34%|
|Yoku.com (YOKU)||$30.50||$3,130||142%||$50.00 to $25.57||23.8||17%|
|Qlik Technologies (QLIK)||$23.48||$1,810||137%||$29.25 to $14.00||58.7||25%|
|Oasis Petroleum (OAS)||$31.92||$2,940||129%||$32.56 to $13.88||32.6||136%|
|Vera Bradley (VRA)||$36.33||$1,470||126%||$41.01 to $22.00||32.7||16%|
Broadsoft (Nasdaq: BSFT)
This IPO meandered out of the gate, trading sideways for more than four months, and then took off like a rocket. In just three months, investors that bought shares under $10 in early November are sitting on a 250% gain. The company provides dedicated servers that handle all manner of voice traffic, mostly for enterprises. Business certainly looks solid: Broadsoft has blown past estimates for each of the past two quarters and analysts now think sales can rise 25% this year, while profits may surge more than 80%.
This is clearly a case where momentum has carried this stock well past the range in which it deserves to trade. For starters, competition is intense from the likes of China's Huawei and Acme Packet (Nasdaq: APKT). Huawei in particular undercuts Broadsoft on price by a large margin, so Broadsoft may start to see more substantial pricing pressures. Microsoft (Nasdaq: MSFT) appears to be gearing up to make a major push into Broadsoft's market as well.
Second, Broadsoft is heavily tied to Verizon (NYSE: VZ), which is rolling out its FIOS Service. The state-of-the-art FIOS service has been a hit, reaching 40% penetration in some markets. Yet Verizon has clearly plucked the low-hanging fruit and growth rates seem bound to slow.
Analysts will roll out their 2012 forecasts when Broadsoft releases its 2010 fourth quarter results, which is when I expect to see growth-rate projections start to cool. That's because the whole market is only growing 10% and even if Broadsoft continues to take market share, then the top-line is still likely to grow by about 20% or less in 2012. Earnings per share may rise from a projected $0.56 in 2011 to around $0.80 in 2012, but shares trade for more than 40 times that projection. All it takes is one quarter where Broadsoft fails to surge past forecasts and the forward multiple would shrink by a significant amount. Shares, which currently fetch $35, would move back to around $25 once the reality of slowing growth sets in.
Three weeks ago, I noted this was one of the most heavily-shorted stocks in the market. As I wrote then, "the company's $4 billion market value likely overstates the potential cash flow the company will squeeze out of its (rare earth) mines in coming years." That still looks to be the case.
JinkoSolar (NYSE: JKS)
This producer of solar wafers likely skyrocketed for a pair of reasons: investors were bearish on solar stocks at the time of its May 2010 IPO, forcing underwriters to cut the price. Just as important, the company delivered white-hot results in subsequent quarters. Meanwhile, shares that had run too fast up to the $40 mark back in November now trade for a more reasonable $27 -- a solid entry point if you missed the first run in this stock.
Ironically, the share price pullback has come even as management has taken guidance up yet higher. Back in November, analysts thought Jinko would earn roughly $4 a share in 2011. EPS above $5 now looks more likely to happen, translating into a price-to-earnings (P/E) multiple of just five.
The key to JinkoSolar's success is its very low-cost structure. That means the company can stay profitable if the solar industry experiences a slowdown and the company can maintain industry-leading profit margins when demand and pricing are strong. Gross margins currently exceed 30%, which is very impressive in such a commoditized business.
This is never going to be a high multiple stock, as the company's most impressive growth spurt has likely passed. Yet over the long-term, single-digit top-line growth looks attainable, with profit growth a tick higher. If shares traded up to just eight times projected 2011 profits, then shares would move right back to the 52-week high of $41. That's a 50% gain.
Youko.com (Nasdaq: YOKU)
This company went public just two months ago, quickly zoomed from the $27 offering price to $40, and has subsequently come all the way down below the point where it ended its first day of trading. Youko.com is aiming to become the YouTube.com or Hulu.com of China, and has already built a very impressive roster of content. The company now controls roughly 40% of the Chinese online video market, according to Goldman Sachs. And unlike YouTube, Youko has aggressively pursued advertising from the beginning.
Yet it's still a high-cost business, and the company may not generate profits until 2013. That's why it's hard for me to get overly excited about the business model, unless Youko can start to generate accelerating sales and shorten the time frame to get into the black. Goldman Sachs believes the company will be wildly profitable by the middle of the decade, but most investors are appropriately taking a wait-and-see attitude, especially since YouTube.com, the clearest analogue, is said to remain unprofitable despite its massive heft. This is certainly a stock worth watching.
IPOs that deliver strong quarterly results can quickly become momentum stocks, as is the case with Broadsoft. A lofty valuation means that the company can't afford any missteps. By contrast, expectations for JinkoSolar appear too low and the recent pullback makes the stock much more appealing.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.