Recent IPO Review Ahead Of Facebook's Offering

by: The Value Investor

With the much anticipated IPO of Facebook (NASDAQ: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 (NYSE: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 (NYSE: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 (NYSE: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 (NYSE: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 (NYSE: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.

Mixed bag
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's multiple
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.