By David Sterman
The frenzy over the recent initial public offering (IPO) (Nasdaq: LNKD) made one thing clear: Investors are desperate to get a piece of companies that look destined to be thriving long-term businesses. Yet many new IPOs don't really have an extended shelf life. They raise money in the midst of a hot growth spurt, the growth eventually cools, funds dry up and the shares are eventually forgotten.
With that in mind, I've been looking at all of the IPOs of 2011, searching for companies that can double or even triple their revenue bases in the next decade. Here's what I've found...
1. Sequans Communications (Nasdaq: SQNS)
Moore's Law, which states that the number of transistors that can be placed inexpensively on an integrated circuit doubles about every two years, has clearly been in place in the wireless sector. Data traffic can zoom across cell-phone networks at ever-faster speeds. Second-generation networks (known as 2G) appeared on the scene two decades ago, 3G networks arrived in the middle of the last decade, 4G networks are now being rolled out by the likes of Verizon (NYSE: VW) and Sprint (NYSE: S). Within a few years, we'll be speaking of 5G. By then, you may have the ability to wirelessly download hi-definition movies on any mobile device at super-fast speeds.
France-based Sequans is at the heart of the trend, developing chips that populate some of the most advanced wireless networks. Analysts at Needham recently wrote, "By tying itself entirely to adoption of next-generation technologies, Sequans has positioned itself as a pure play on the growth of 4G/mobile broadband." Those analysts predict the number of 4G-enabled mobile devices will soar from about 30 million in 2011 to nearly 300 million by 2014. Even in the absence of market-share gains, Sequans looks poised for solid multi-year growth simply on the back of an exploding market.
Sequans generated $68 million in sales in 2010, a figure that could rise to $170 million by 2012, according to Needham. Yet by bottom-line metrics, more patience will be required, as this is a low-margin business.
Sequans only recently began to generate positive earnings before interest, taxes, depreciation and amortization (EBITDA), and even with all of the impressive top-line EBITDA growth, EBITDA will only likely reach $30 to $40 million next year. Exclude the IPO cash, and shares trade for about 10 times projected 2012 EBITDA. EBITDA will presumably swell nicely higher in subsequent years, so investors are paying up a bit now for a likely bargain down the road.
2. Zipcar (NYSE: ZIP)
As states and cities are further pressed to raise revenue, they are making life miserable for car owners. In places like New York City, the cost and hassle of owning and parking a car seems to get worse every year. Making matters worse, a number of urban parking lots are being torn down for new high-rise construction. This spells an even greater shortage of parking spaces.
It's only a matter of time before an additional number of car owners give up their keys and simply start using a car by the hour from providers like Zipcar. The company went public in mid-April at $18 soared to nearly $30. Thanks to the recent market downdraft, shares can now be had for about $23.
The fledgling company has built a loyal and sticky customer base of nearly 600,000. Just 2% of members cancel in any given month. This has translated into a sales base that has risen from $106 million in 2008 to $186 million in 2010. Recently-raised funds through the IPO should help Zipcar expand its fleet and membership. Goldman Sachs predicts membership will grow 20% annually though 2016, potentially pushing sales above $500 by then.
This kind of growth should also help move Zipcar into the black. The company had -3% EBITDA margins in 2010, but analysts are modeling for EBITDA margins to rise to 6% by 2013. Shares still look pricey in the context of near-term EBITDA potential, but longer-term focused investors should benefit from a steady and strong growth trajectory.
3. Gevo (Nasdaq: GEVO)
Many investors have tired of the unfulfilled promises of green-energy technologies: Hydrogen-powered cars garnered lots of buzz in the past decade, though just a few prototypes are on the road after billions in research and development (R&D) spending; now solar and wind stocks scrape along at multi-year lows as a lack of government subsidies shows their inability to generate power at a low cost.
But we'll eventually crack the code with these technologies, and one of the most promising new approaches can be found with biofuel producer Gevo. Its isobutanol technology has already proven itself in ever-larger test plants and already appears to be more cost-effective than corn-based ethanol, potentially helping to reduce our dependence on oil imports without government support. "Unlike ethanol, GEVO's isobutanol is a more valuable product that can be used in greater number of end markets and takes advantage of existing infrastructure," note analysts at Citigroup.
The key for investors is the future price of oil. If oil slips back below $75 a barrel, then Gevo's technological approach won't be cost-effective. But if we're faced with a future of triple-digit oil, then this company may have a home run on its hands. Of further concern, the company is at least 12 months away from starting up full-scale production and another year or two from generating solid EBITDA. Analysts at Citigroup think the company's recent capital-raising efforts could be sufficient, but suggest the company may look to raise money again in 2012 if it is beset by any delays or can't line up partners. This is the biggest risk to the stock for current investors.
Shares have lost nearly 30% in the subsequent market pullback after soaring above $25 in mid-April. They now stand at about $17. Shares could slip further if the production ramp-up gets pushed out, but if the company can deliver on its technological promise, sales, profits -- and the stock price -- will be well higher in a few years.
Newly-public companies often stumble after their first few quarters, so these stocks surely carry downside risk. But over the long haul, each of these companies is aiming at large and potentially profitable markets during the next five years, which could also lead to a major boost in their stock prices.