Following the botched initial public offering of Facebook (FB), there was rampant speculation that the IPO market had been dealt a significant blow. For an extended time period spanning from May 18 to June 27, not a single company dared to put forward an IPO to follow up after Facebook's debacle.
Yet as new companies eventually made their way onto the market, several have thus far proven that there is still significant money to be made through IPOs. The rallies that have followed have shown that investor interest remains high for promising prospects. However, as several of these companies now trade with more than a 20% gain without any significant indication of increased operational performance, investors should begin to exercise caution in believing the extended rallies are prone to continue. The following companies have all seen double-digit gains since their entry into the public space. All values were taken mid-day during the trading session of August 7, 2012.
|Name||Public Date||Offer Price||1st Day Close||Last Price||% Change|
|Kayak Software Corp (KYAK)||July 20||$26||$33.18||$32.20||23.80%|
|Palo Alto Networks (PANW)||July 20||$42||$53.13||$55.44||32.00%|
|Five Below (FIVE)||July 19||$17||$26.50||$32.75||92.60%|
|ServiceNow (NOW)||June 29||$18||$24.60||$28.00||55.60%|
Kayak is an online travel search service. The company currently trades with a market capitalization of $1.21 billion and a trailing P/E ratio of 40. With an above average price-to-sales ratio of 5.02 and a lofty price-to-book ratio of 4.35, the company is trading with full expectation for abundant growth. At these levels, I would be cautious to buy the company and would rather wait for further confirmation of its ability to grow its revenues. The popularity of the company is undoubtedly spawning from the success story of market peer Priceline.com (PCLN), who's risen several hundred percent since its lows in 2009. The company trades in a similar market space to names such as Expedia (EXPE) and Travelzoo (TZOO).
Palo Alto Networks is a network service provider with clientele found in both enterprises and government entities. This budding company now carries a market capitalization of $3.71 billion and a forward P/E ratio of 253.45. The company currently supports an alarming price-to-sales ratio of 16.6 and a surprising EV/EBITDA of 444.49 according to Yahoo Finance. A quick look at the company's S-1 filing shows that prior to the IPO the company was working with a shareholder deficit of $62 million back in January 2012.
Investors should be aware of the large valuation risk currently built into the company despite the promising future of the unfolding business plan. Despite the promise of rapid revenue growth, it will take a significant amount of time for Palo Alto Networks to truly establish itself as the premier brand in its market space. Likewise, it's questionable if Palo Alto Networks will ever be able to earn enough in the short-to-medium term to merit its excessively high valuation. In an industry where aggressive players appear to pop up over night, the lengthy time the company will need to establish itself might be far too long to be getting in at this point in time. The company finds itself in a market space shared by peers such as Check Point Software Technologies (CHKP) and Cisco Systems (CSCO).
Five Below is a discount retail chain with a focus on the teen and preteen population. The company now sports a market capitalization of $1.77 billion and carries a trailing P/E ratio of 617. With a price-to-sales ratio listed at a high 5.23 and an EV/EBITDA of 58.33, Five Below has quickly outpaced realistic metrics for a retail chain of its stature. Though undoubtedly primed for long-term growth at a mild pace, the company's stock now faces a large valuation risk at these current prices.
Unlike the other three IPOs mentioned here, Five Below trades with a lucrative valuation despite operating in the store retail space unlike the online and information technology space that characterizes the other companies mentioned here. I personally remain short on Five Below as the strong earnings growth needed to justify the price is still several years away. For now, the company will grow at a pace of a few dozen stores a years, which is hardly a rate worthy of the excessive valuation placed on it. Five Below finds peers in names such as Dollar Tree (DLTR) and Family Dollar Stores (FDO).
Service Now is a cloud-based information technology service provider. The company currently supports a $3.37 billion market capitalization and is not expected to have positive earnings this year in order to support a positive P/E ratio. The company is trading at a lucrative 19.95 price-to-sales ratio which should make some investors a bit cautious.
According to the company's amended S-1 filing, the company had $185 million in total assets prior to its IPO as of March 2012. The company roughly trades in a market space filled with software companies such as BMC Software (BMC) and CA Technologies (CA). I personally remain short on Service Now given the extended timeframe it'll need in order to to grow its earnings to a reasonable level expressed in the current stock price.