The IPO path followed by Twitter (Nasdaq:TWTR) and Facebook (Nasdaq:FB) is a predictable one.
Many young companies come public with unrealistically high expectations, as sales growth is often front-loaded before the offering (to make the IPO more attractive) and expenses quickly spike after the deal (as the IPO funds start to get deployed into growth initiatives).
As a result, shares often swoon before quarterly results improve. That’s the perfect time to catch a young IPO.
Here are three other companies that have stumbled out of the gate after going public this year -- but they're poised to win back investors as they finally deliver on the promise they showed as private companies.
1. Opower (Nasdaq:OPWR)
After nearly a century of predictable operations, power companies now face a much more challenging landscape. They are wrestling with tightening environmental regulations on their power plants, and they're watching their customer base slowly gain independence as an increasing number of homeowners and businesses switch to solar power.
To adapt to these changes, they're seeking out 21st-century data analysis techniques -- and many of them are turning to Opower, which provides cloud-based energy usage analytics. This young company, which had just $10 million in sales in 2010, should approach $150 million in sales by next year as it now works with nearly 100 utilities. That kind of growth led to an initial bout of post-IPO euphoria, but as small-cap stocks have come under pressure in recent months, those early investors have fled.
The sell-off may be attributable to the fact that Opower is not yet profitable, which often is a sign that another capital raise will be necessary before the company is self-funding. That’s not an imminent concern as Opower has more than $100 million in IPO proceeds parked in the bank, while its burn rate is around $25 million to $30 million a year.
Investors will get a fresh snapshot of Opower’s growth trajectory when second-quarter results are released next Tuesday.
2. Coupons.com (COUP)
This provider of online coupons came public at $30 a share in March, had fallen by half two months later, rebounded all the way back to $30 in early June, and is once again back below $20. That’s a bit too much drama for more conservative investors -- but business as usual for investors willing to stomach the volatility of new IPOs.
It’s an interesting business model: Online couponing is growing much faster than traditional Sunday circular coupons, and this company has the top market share. The runaway for growth is ample: digital freestanding inserts still account for just 1% of the total coupons issued -- but around 10% of coupons redeemed. Analysts at Merrill Lynch note that “our proprietary survey corroborates our thesis that the majority of grocery shoppers coupon, and younger generations prefer digital coupons.”
Coupons.com delivered solid results in its first quarter as a public company, generating first-quarter sales of $51 million, ahead of the $43 million consensus forecast. Sales are on track to rise roughly 30% in 2014 and again in 2015 (to around $290 million).
To fuel that growth, Coupons.com is pursuing a kiosk-based model, called RetailerIQ, which is now rolling out across 8,000 Walgreens (NYSE:WAG) stores. The company is also rolling out those kiosks in Dollar General (NYSE:DG) stores, and hints that another major retailer has been inked for their own store-based rollouts. Investors will get an update on this business model today as second-quarter results are released.
3. Borderfree (Nasdaq:BRDR)
When this company came public at $16 a share in March, it scored a solid first-day pop -- and then slowly fell out of favor. Yet an appealing business model, coupled with just-announced second-quarter results, should help this young company to regain its footing with investors.
Borderfree helps online retailers conduct global transactions, handling customer care, risk management, localized website customization and other services for clients such as Neiman-Marcus, Visa (NYSE:V) and others. Sales have shot up from $37 million in 2011 to $110 million last year, and second-quarter sales rose 34% from a year ago to $31 million.
Analysts at Credit Suisse, who see shares nearly doubling to their $25 price target, note that the company is “1) (a) scarce pure play exposure to international e-commerce growth, and 2) (an) open-ended growth story with a large addressable market.” Analysts at Pacific Crest Securities have a more modest $20 price target (representing 50% upside), predicting annual growth of 20% for Borderfree as it is in a position to “launch roughly 25 to 30 new branded websites annually.”
Risks to Consider: These young companies do not yet have mature shareholder bases, and as a result, lack support if they experience a bout of quarterly indigestion.
Action to Take --> Not all IPOs take off immediately. Some companies need to prove themselves over a series of quarters until investors grow to trust management. Yet once these companies build a solid track record, they can build an ever-growing base of shareholders that pushes shares up to fresh highs.
P.S. The only thing better than investing in high-quality companies like these recent IPOs is investing in high-quality companies that return money directly to shareholders. In our latest research, we've found 13 market-dominating companies that have been hoarding billions in cash since the financial crisis -- and they're set to pay out $39.5 billion in dividends in 2014 alone. To get access to the names and ticker symbols of some of these companies, simply view this special report.
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