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The market is entering full summer mode as attention is turned to more leisurely pursuits. The recent malaise in the markets has made most investors all the more eager for a break.

Filings continued to build with 15 new ones in the last two weeks (shown in the table here with our planned coverage names in bold type.) However, most of the buzz in the last two weeks was about the filing of social gaming company Zynga, which came just as we went to press. Along with GroupOn (NASDAQ:GRPN), it’s safe to say that these two deals will soak up most of the interest and energy in the IPO market during July.
Company
Positioning
Luca Technologies
Biotech/Clean Energy
Zynga
Social Games
Avenue Capital
Mortgage REIT
J&P Realty
Real Estate Trust
Trinseo
Specialty Plastics
N. American Financial
Bank
BlueArc
Networked Storage
Aspen Aerogels
Insulation
LipoScience
Medical Diagnostics
Clovis Oncology
Biopharma/Cancer
Memorial Production
Energy LP
PetroLogistics
Propane Processing
Ubiquity Networks
Wireless Networking
Oaktree Capital
Investment Mgmt
Imperva
Datacenter Mgmt
Total pricings remained slow and steady with five in the last two weeks of the month. Of those, Bankrate (NYSE:RATE), KiOR (NASDAQ:KIOR) and HomeAway (NASDAQ:AWAY) have been added to the IPO Candy Ecosystem. There are no deals in active marketing right now but we expect some deals to kick off next week. If the markets hold many will attempt to make the “July window” before things slow down further in August.
Selected Filing Notes
Iperva, a data security software company, recently filed with JPMorgan (NYSE:JPM), Deutsche Bank (NYSE:DB), RBC, Lazard (NYSE:LAZ) and Pacific Crest on the cover. Data security has become a very hot issue thanks to recent headlines concerning large-scale data breaches, including the Sony (NYSE:SNE) Playstation Network and Citibank (NYSE:C). The problem is pervasive and there are meaningful (but not headline grabbing) data breaches on a daily basis.

Imperva has annual revenues of $60m growing at 40% but is still generating an annual operating loss of about $12m. The company provides security infrastruc­ture at the data and application layer (rather than perimeter or network security.) VC firms Greylock, Accel, USVP all having seats on the board. We expect investors will have significant interest in the Imperva roadshow to understand more about the solution. There should also be a resurgence of interest in other public security companies in the space, including Fortinet (NASDAQ:FTNT), Sourcefire (NASDAQ:FIRE), Check Point (NYSE:CKP), KEYW Holding (NASDAQ:KEYW), WebSense (NASDAQ:WBSN), and Blue Coat (NASDAQ:BCSI). So far Intel (NASDAQ:INTC) hasn’t said much post its acquisition of McAfee. Private equity firm Thoma Bravo has been active in this space as well with acquisitions like Tripwire in 2011, and Entrust in 2009.

Ubiquiti Networks, a kind of low-cost DIY wireless networking supplier for small scale commercial solutions, also filed recently. These are practical and very cost effective for small companies in an area not well serviced by commercial broadband providers. They supply a broad range of radios, antennas and tools to provide high speed wireless networking over unlicensed radio frequency (WiFi mostly.) For the fiscal year just ended it should report something on the order of $180m in revenue and over $50m in operating income. Growth and profits are being driven by a relatively new product line (AirMax) while older more commodity networking products are in decline. The deal only has two banks on the cover, UBS (lead) and Raymond James. If we were advising the company we’d suggest that it will desperately need some additional banks on the deal for coverage. A stock like this won’t get talked about much at UBS. The company may be able to address this if it does a secondary offering where it can include more banks. The founder and CEO, 33 year-old Robert Pera, is an engineer from Apple (NASDAQ:AAPL). IT should make for an interesting roadshow.
Top 5 for June
Company
Ticker
Gain
Area
MediaMind
+34%
Mobile Advertising
Endocyte
+26%
Small Molecule Drugs
NetSpend
+25%
Debit Cards
Higher One
+25%
EduCommerce
Fluidigm
+22%
Microfluidic Systems
Performance
The average stock in our ecosystem was flat in the month of June, underperforming the S&P, which was up 3%. The top 10 names were up 23% and the bottom 10 were down 22%.
MediaMind announced that it had agreed to be acquired after struggling to get much recognition as a recently public company. Most of the other names are small but solid companies that continue to execute on their plans to grow post-IPO.
Bottom 5 for June
Company
Ticker
Loss
Area
DangDang
-33%
Online Commerce China
Bona Film
-28%
Film Distribution China
Renren
-27%
Social Network China
Meru NW
-22%
Enterprise Wireless NW
FriendFinder
FFN
-22%
Adult Social Networks
Chinese companies took a beating in June as the appetite for risk receded and concerns about transparency and a slowing economy in China eclipsed optimism and opportunity.
FriendFinder struggled to complete its IPO and has been suffering as a public company since then. We’d put the company in the “extreme” category of dating and relationship sites like Match.com, Jianyuan (China) and Meetic (Europe). Management has absurdly attempted to position the company as a “social network” for adults who might define themselves around niche sexual preferences. Although the company has an opportunity in what is essentially online pornography and a kind of “dating,” it’s unlikely that the social network positioning will stick. The company should use some of its IPO proceeds to buy a new drawing board and develop something that investors will be able to embrace (keeping their hands where we can seem them!)
The Social Networking “Bubble”
There isn’t a general bubble in the stock market but the enthusiasm and price action in a handful of very prominent companies has captured the attention of the market, specifically LinkedIn (NYSE:LNKD), GroupOn, Zynga, and Facebook.
More broadly, the massive development of the mobile computing space has created new platforms for applications and content that are fueling a drive to startup companies that can target this new growth area. In many (but not all) ways it is analogous to the first internet wave experienced in the late 1990s.
An important difference that is being maintained, at least so far, is that these companies have substantial revenues and, in some cases, operating profits. GroupOn is a notable exception to this, which we will come back to.
Although the first bubble is famous mostly for disasters like pets.com and the ultimate crash in the stock market, it did create companies like Amazon (NASDAQ:AMZN) that are finally trading at new highs. There were also many others, including PayPal/eBay (NASDAQ:EBAY), BEA Systems, and Yahoo (NASDAQ:YHOO).
We can expect the same arc of success and failure in the mobile internet and social-network driven wave of today. It’s not just that some companies will succeed and others will fail. Even “knowing” the winners can be useless if the valuation isn’t right. For example, buying Amazon or eBay in 1999 at what some might say was the “peak of expectations” would mean waiting years for those companies to grow into those expectations.
This same fate may await many that buy shares in Facebook or LinkedIn. It’s not that these companies are not “worth” that much, but rather the assumptions investors are making about how many years of uninterrupted growth and consistent execution are being factored in.
Our approach to managing is to continue to focus on the companies with the best positioning and highest potential. But valuation and timing will matter. For example, companies like Facebook or LinkedIn merit a position in the IPO Candy Folio but a small one to start with. Companies like GroupOn may enjoy a strong position today but their potential is not as clear. Combined with a high valuation, this is a stock we would tend to avoid.
Source: IPO Market Update: 15 Companies File in Last 2 Weeks