A reason to be cautious with IPOs is the likelihood that the unsuspecting public will be stuck holding the bag while insiders and brokerages profit from selling overinflated stock. It is important to value an IPO correctly, even when sometimes management juices the numbers prior to the IPO and there is a unexpected drop in revenue and EPS growth in the first quarter or year after the IPO.
If Heelys can continue to grow revenue and earnings at 20%+ the stock should be okay; any less than that and it may come down more. The stock, with a greater than 40% growth rate for the next few years, could see a significant increase in price. Analysts are forecasting 24% earnings growth this year. It should also be noted that they beat earnings estimates by 57% last quarter and it would be hard to really determine with accuracy what earnings will be this year since this company doesn’t have a long history to base estimates on, and the timing of orders, inventory and the demand for their shoes are all subject to wide changes at this point.
HLYS 6-mo chart
Disclosure: Author has no position in Heelys