MuleSoft's Strong Start Indicative Of A Bright Future

| About: MuleSoft (MULE)
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Summary

MuleSoft Inc. had a strong start to its IPO, closing at a 46 percent premium of its initial price on its first day.

MuleSoft sells a valuable product through connecting different business data and devices together, and it has a proven ability to attract large corporations.

The company is currently unprofitable and has large debt, and could struggle to grow as its faces intense competition from larger firms.

MuleSoft has good long-term potential, and its initial success could spur other tech IPOs to move forward soon.

Tech company MuleSoft (NYSE:MULE) may not have debuted its IPO with the same fanfare as tech behemoth Snap (NYSE:SNAP), but it was more successful on its first day. MuleSoft closed its first day of trading at $24.75, which TechCrunch reports is a 46 percent premium of its $17 initial price. Even that initial price was higher than earlier expectations of $14-16.

MuleSoft's success portends very good signs for other tech businesses looking to go public. Snap may be bigger, but its size and fame made it a poor example for other, smaller tech companies to look at as an example for whether to go public or not. Corporations in 2016 waited to go public until conditions got better, and that "better" looks to be here now.

So this is good for the tech market IPO as a whole, and investors who managed to buy the stock at $17 should feel great. But what about the majority of investors? Will MuleSoft fall after a frenetic few days of trading like so many other IPOs, or does it actually have long-term potential?

The answer appears to be the latter. MuleSoft can point to both ongoing technology trends and its own growth to show that it has long-term potential. There are some problems, such as debt, and investors may be wary of jumping on after the stock price has already jumped, but that should not take away from MuleSoft's ability to climb even higher.

Changing Technology

Understanding what MuleSoft does can be difficult without a tech background, but the company gives an accurate description in its SEC filing when it states, "our mission is to help organizations change and innovate faster by making it easy to connect the world's applications, data, and devices."

MuleSoft sells cloud technology which connects a business's different applications, data, and devices. Every business, over the course of its activities, collects data which, while seemingly useless at first, could become extremely powerful when connected and placed into the right hands. MuleSoft gives the example of an auto insurer which collects data on roads all over the country. By making this data accessible, a company can give its citizens new information which can help them drive safely. This improves the bond between the company and its customers, ensuring a loyal support base.

Selling to Corporations

This data-driven approach is more useful for large corporations, and MuleSoft has successfully proven its ability to attract them. Its customers include both traditional, large businesses like McDonald's (NYSE:MCD) and Coca-Cola (NYSE:KO), as well as rising tech businesses like Spotify and Salesforce (NYSE:CRM). As a result, its total revenue has grown from $57 million in 2014 to $187 million in 2016.

It should be noted that MuleSoft is not profitable and has an accumulated deficit of $236.2 million as of 2016, but this is hardly unusual for a tech IPO. Most importantly, its net losses shrank from $65 million in 2015 to $49 million in 2016.

It is simplistic to suppose that MuleSoft's net losses will just continue to go down for the foreseeable future, and the company does admit that "we cannot assure you that we will achieve profitability in the future," but shrinking losses is still a good thing. And while its deficit may worry investors, the fact that MuleSoft plans to use the IPO proceedings to grow instead of paying it down indicates that it is not a serious concern.

MuleSoft's biggest challenge going forward will be its ability to compete with a wide range of other factors. Companies will inevitably attempt to connect their data and devices themselves without relying on a third party, and there are larger corporations like Oracle (NYSE:ORCL) and IBM Corp. (NYSE:IBM) which manage other companies' infrastructure. However, MuleSoft occupies a vital and unique niche, which should allow it to thrive.

Good Long-Term Viability

MuleSoft will obviously not reap the single-day gains it made on its IPO anytime soon, and will likely fall in value when the IPO frenzy wears off. But this should not take away from its significant long-term potential. The Internet of Things and other technological advances means there will be more devices out on the market, and MuleSoft presents an easy solution for companies who want to tie those devices together to collect data.

This means it should continue to grow going forward and will be a useful long-term investment. Even if MuleSoft falters, its initial success is great news for the tech IPO market. Look for other companies to move forward on going public and be more aggressive with their pricing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.