Pandora Media (NYSE:P), a top Internet radio platform, was expected to have a blowout IPO last week.� While the company was able to boost its offering price and raise a cool $235 million, the stock quickly fell apart.� By the end of the week, investors had sustained big losses.
Does this mean that the IPO boom is over?� Perhaps,� but I think it�s too early to tell. �The fact is that there haven�t been many IPOs this year � at least for emerging tech operators.� Besides, other hot IPOs, such as LinkedIn (NYSE:LNKD) and Yandex (Nasdaq:YNDX), are still well above their offering prices.
Despite all this, there are still some interesting trends emerging:��������
Profits Matter:� Sounds obvious, right?� The 1990s were most likely an aberration.� After all, investors want to invest in companies that are either highly profitable or on the path to profitability.� This has always been a driver for breakout companies.� Just look at some of the top IPOs of the last 10 years, such as Google (Nasdaq:GOOG) and Salesforce.com (NYSE:CRM).
As for Pandora, the company has never made a profit.� In fact, according to its prospectus, it expects losses to continue until the end of 2012.
Consider that the company has to pay roughly half its revenue to the recording industry — and these fees will increase over the years.� In other words, there is no operating leverage in the model.
Thus, if investors are focused on profitability, this does not bode well for IPOs like Groupon.� This company, which had $117 million in operating losses in first quarter, makes Pandora�s losses look like rounding errors.
However, profitable companies � such as Facebook and Zynga � should do quite well.
Flipping: Keep in mind that it�s mostly hedge funds, mutual funds and institutions that get most of the allocated shares of IPOs.� Basically, Wall Street underwriters hope that they will hold onto the shares for the long-haul.
But again, the Pandora deal shows that IPO investors are really interested in flipping shares for a quick profit.� On its first day of trading, the volume was more than 40 million shares.� The number of shares issued was only 14.6 million.
So to effectively launch IPOs, underwriters will likely need to greatly underprice the deals and keep the share count low.�
Volatility:� Tech IPOs should be nice investments for day traders.� If they are nimble, it will be possible to make nice gains with quick trades.
However, IPOs can punish individual investors.� In a few hours, it’s easy to lose 20% of your investment.
Thus, as I�ve indicated many times in my InvestorPlace columns, the best strategy is to wait a couple quarters until buying hot tech IPOs.� Often, you�ll be able to get better valuations.
Tom Taulli�s latest book is �All About Short Selling� and he has an upcoming book called �All About Commodities.�� You can find him at Twitter account @ttaulli.� He does not own a position in any of the stocks named here.
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