It's been a very mixed IPO market so far this year. There's been much piling on after the collapse of internet IPO stocks like GroupOn (GRPN), Zynga (ZNGA) and even the mighty Facebook (FB). A popular thread in the mainstream media has trumpeted "the death of equities." We find the contrary view, at least insofar as US equity markets are concerned, much more interesting.
- Innovation is the only game in town. Although the internet and mobile computing are exciting we're not talking about them. The activity is much broader and goes down to fundamental advances in materials and manufacturing. 3D printing has received lots of press in the past few months and stocks like Three D Systems (DDD) and Stratasys (SSYS) have done well. Beyond the novelty of 3D printing are changes in manufacturing technology, robotics and the underlying business processes that determine quality, costs and efficiencies. More recent IPO names like Proto Labs (PRLB), SPS Commerce (SPSC) and E2Open (EOPN) fit into this category. Underneath it all is the increasing use of nanotechnology to harness natural forces like algae (as Solazyme (SZYM) is doing) quantum computing and biochemistry. Harris & Harris (TINY) is a terrific window and opportunity to connect with these developments.
- The US is tapping into a new supply of abundant domestic energy. The US is sitting on a massive amount of additional natural gas that is being freed up from shale formations through hydraulic fracturing. Natural gas is already inexpensive (especially relative to oil) but now the US is on a path that could almost double the existing output of natural gas supplies between now and 2035. This level of growth, combined with improvements in efficiency, could effectively eliminate oil purchases from places like Saudi Arabia. (Most US oil is actually imported from Canada not OPEC.)
- A sick Europe is probably going to be weak. This isn't really good news for anyone. But on a relative scale it's not bad for the US, which will be the only large primary market with improving fundamentals from innovation, increased corporate investment, lower energy costs, and a relatively more business-friendly regulatory and economic framework. Yes, large US companies will see their revenues from Europe remain weak but they will have improved domestic growth and better margins to counter it.
- Election-year uncertainty will give way to some clarity and free up corporate investing. This election is shaping up to be a major contest over less versus more government/taxes. Put alongside the pending fiscal spending "cliff" the US government is staring at, this has created a fog of uncertainty that has corporations and consumers on the sidelines. The corporations are the more important aspect of this given their massive cash balances and current reluctance to increase their capital spending. Some clarity could unleash a major corporate spending wave in 2013 that would fuel top line and bottom line growth in the years to come. If this occurs the stage would be set for accelerating growth and a bull market in equities.
We're going into September with a good number of paused deals from August and some new filings. As we noted also in the last Candygram, a loophole in the JOBS act allows for companies to file secretly and unveil their IPO intent just before they launch the deal. So there may be far more coming this Fall than people realize. Here are a few to look for:
- FleetMatics (FM) - Managing fleets of cars in the cloud. This is a big trend not just with cars but things in general. Private company Uber has received lots of attention in the consumer space. FleetMatics provides these services to operators using a SaaS/cloud model. Revenues are running at $120M/year with $7M of positive operating income. The company is based in Ireland and proposes to trade under the symbol FM. BofA is leading the deal along with Barclays, RBC, Stifel and Blair. In addition to Uber we see public names like FleetCor (FLT), ZipCar (ZIP) and even OpenTable (OPEN) as being around this space and category.
- Trulia (TRLA) - Following in the footsteps of the very successful Zillow (Z) offering, Trulia is hoping to appeal to investors who may have "missed" that one but still like the space. We certainly do although we'll be making a careful inspection of Trulia, especially versus Zillow. The deal is being led by J.P. Morgan with Deutsche, RBC, Needham and Blair also on the cover. Right now Trulia is losing about $14M on $60M of revenue. The trend there is not improving, which gives us pause for now. Related companies we track in this area include HomeAway (AWAY), RealPage (RP) and BankRate (RATE.)
- Safety-Kleen (SK) - Here's a name from the past being re-introduced to the public equity markets after private equity restructuring. This is a $1.3B company in the industrial sector generating small but increasing operating income. We also expect a strong cash flow story to emerge from their marketing presentation. We'll be looking at industrial, energy and even MLP names if they have stable revenues, good margins and high payouts. It's not clear yet how SK will shake out. The deal is being led by Credit Suisse and Morgan Stanley.
- LegalZoom (LGZ) - This one didn't make it out prior to the August hiatus. A year ago this deal would have been a slam dunk but as we have written about already the deal "may face some early hurdles" due to a shift in their business strategy. It can certainly pay off but it's hard for investors to know how fast or slow it will happen. They loved the original "pure online" legal resource. There's a fleet of bankers on this one led by Morgan Stanley so it should still get done, perhaps with some concessions on price.
- Workday (WDAY) - One of the hottest companies in the SaaS space that seeks to rival the success of Salesforce.com (CRM) on the back end of enterprise computing where human resources and administrative processes need new infrastructure. Workday was included in a presentation we prepared on three private companies with IPO potential (the other two were Etsy and Quora.) That deck is available to Toffee subscribers via this link: Looking at Etsy, Workday and Quora.
There are many more in the pipeline, including Gigamon (network management), CyrusOne (datacenters), Archstone (REIT), Zoetis (animal health), that we expect to be taking a close look at and publishing on in the coming weeks.
Finally, we'll announce some improvements in the IPO Candy service and more features for active subscribers. Enjoy the last few quiet days of summer and prepare for a busy end to the year!