With the much anticipated IPO of Facebook (FB) happening soon, let's have a look at how some recent initial public offerings have fared. I selected five names which have gone public this year and are valued at $500 million or more.
Guidewire Software (GWRE)
This system software provider went public January 25, at $13 a share. Its first day was a success and shares closed the day up 31.7% to $17.12. Shares continued their rally in recent weeks as the cloud-based industry is still very hot after a string of acquisitions in this area is recent months. The company is valued at roughly 6 times revenue and a 100 time annual profits as revenues doubled in the last two years. Shares closed Friday at $22.11, up 70% from its offering price.
US Silica holdings (SLCA)
This silica sand provider was sold to the public at $17 a share on the first day of February. It closed the first day down 5.9% to $16, but recovered slightly in the next two weeks to close at $16.54 which is still down 2.7% as the solar industry in general has been suffering lately. At a valuation of 3.5 times annual sales and 80 times annual profit this silica producer seems to have a rich valuation given that revenues are flat compared to two years ago.
Matador Resources Company (MTDR)
This energy company focused on oil and natural gas shale and other unconventional resource plays. Going public on February 2, it closed the day down 2% from its public offering price of $12. Shares did not manage to recover and have traded in a tight $11.70-$12 range in recent weeks. At 19 times revenue and 100 times profit the valuation is based on future expectations of a successful development of projects rather than its existing production base.
AVG Technologies (AVG)
AVG provides software and services for online users to protect them on the internet. The company, which went public at $16, had a disastrous opening day, closing the day down 19% at $13. It only managed to recover a small portion of its losses, closing at $13.52. Unfortunately no financial information was found for this company.
EPAM systems (EPAM)
This global information technology provider which services independent software vendors to its clients went public on February 8. Shares rallied 16.7% on its first trading day closing at $14. While shares had a little pull back from those levels to $13.58 it still trades up 13% compared to its offering price. Shares seem to be attractively valued at 2.5 times annual revenue and 20 times annual profit despite doubling its revenues in just 3 years.
Although a sample size of 5 recent public offerings is too small to draw any meaningful conclusions, it might still provide a sense of how "good" the public offering market is. On average these 5 companies returned just 4.5% on its first day which is historically small. Furthermore 3 names had negative first day returns. Ever since the shares went public, the average return has been 12% in their first weeks mostly driven by the successful offering of Guidewire Software.
Facebook is expected to be valued anywhere around $100 billion, which is about 30 times 2011's $3.6 billion in reported revenues and about 100 times its rumored $1 billion in net profit.
The sample group above is obviously not directly comparable in terms of size or industry, however it does tell us a bit about how much investors are willing to pay for upcoming companies in their respective industries.
Facebook's revenue multiple of 30 is far above the sample's group range of 3 till 20 times. It's 100 times earnings valuation is in line with 3 of the companies above.
Investors are still willing to pay very high multiples on the existing asset base and do price in growth. Valuing Facebook at $100 billion tells us that investors believe growth will continue for a while and are making a bet on the monetization of its huge user base.
Obviously the sheer size and publicity of Facebook's offering will make it a special situation by definition. While investors are still willing to pay high multiples for new public offerings, one should not expect spectacular debut-day returns as the IPO market is still accessible, but anything but red-hot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.