RetailMeNot (Nasdaq:SALE) went public July 18 at $21 per share. In its first day of trading its stock gained 32%. Is the world's largest digital coupon marketplace still worth owning after its big opening? I'll look at the pros and cons.
Mad Money's Jim Cramer recently outlined his criteria for investing in IPOs. His big three are: (1) good management, (2) the investors behind the company, and (3) who the underwriters are. If these three items don't pass the sniff test there's no point going on to his second set of criteria, which includes analyzing the product or service, how profitable the company is and whether the ultimate market for the product or service is big enough.
Here are the first three criteria.
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Its founder and CEO is Cotter Cunningham. Prior to establishing the company in 2009, Cunningham worked for Bankrate Inc. (NYSE:RATE) for seven years, first as senior vice president of marketing from February 1999 to September 2000, whereupon he became COO until his resignation in March 2007. From there he went on to start some internet businesses such as Divorce360.com with the financial assistance of Austin Ventures, one of the main investors behind RetailMeNot. Clearly, Cunningham understands the internet.
RetailMeNot's COO is Kelli Beougher--its second employee after Cunningham--who joined the company in 2009. Prior to joining the company she worked for both Rakutan LinkShare and GE Capital. Beougher's been instrumental in the success of RetailMeNot's websites. Other key positions are held by seasoned veterans with public company experience at places such as Google (Nasdaq:GOOG) as well as privately held businesses like the Gilt Groupe.
I'd characterize its management as competent.
Investors Behind Company
Its board reads like a who's who of venture capitalists. Also on the board is Brian Sharples, the co-founder and CEO of HomeAway (Nasdaq:AWAY), the world's leading online marketplace of vacation rentals. That's a very helpful person to have on your board. It just so happens that Austin Ventures invested in both start ups to the tune of $206 million. Although Sharples' investment in RetailMeNot is likely a courtesy more than anything else because the two startups were part of the same VC stable; he strikes me as someone very committed to technology innovation.
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Cramer is very negative about private equity firms trying to pawn off investments they've overpaid for on unsuspecting IPO investors. I wouldn't put venture capitalists in the same boat. A major hallmark of private equity IPOs is debt--lots of it. RetailMeNot comes to the plate with just $38 million in long-term debt and $112 million in cash. While it's using $53 million of the net proceeds to pay out accumulated unpaid dividends to Austin Ventures and the other early stage investors, it shouldn't be compared to the dividend recapitalizations popular with private equity.
I have to give the investors a pass as well.
It all comes down to who sold its stock. A strong group of underwriters is usually indicative of an IPO candidate that's first rate. In RetailMeNot's public offering, Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS) were the top three underwriters accounting for 76% of its 9.1 million shares sold. You can't get much better than that.
Second Set Of Criteria
Having passed the first set with flying colors, it's time to address the second. Here we really want to determine the viability of its business model. It's not just about the potential size of the market that's important, but how profitable its revenue is from dollar one. In this regard it's been very successful. In 2010, its first full year in operation, it generated an operating profit of $2.8 million from $17 million in revenue. This is hugely important because it shows the business has a sustainable business model. In 2013, it's looking at $48 million in operating profits from $160 million in revenue.
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The company estimates that globally, consumers spent more than $570 billion using coupons in 2012, a result of the proliferation of smart phones and m-commerce. While it's difficult to know how much of that pie RetailMeNot can grab for itself, it's fair to say that this number will grow as more consumers regularly use digital coupons. For this reason I see a bright future for the company. It just has to continue executing its plan to increase traffic, make more from each retail relationship, expand internationally and continue doing so on a profitable basis.
If it does all this it's a large-cap within 1-2 years.
This is the first IPO in a long time where I don't have a lot of concerns. About the only thing that worries me about RetailMeNot is the inconsistency of its margins since its startup in 2009. Yes, it's made money in each of the past three years, but it's operating margin has bounced around from 16.7% in 2010 to 47.8% in 2011 and then back to 31.4% in 2012. If you do buy its IPO, which wouldn't be a bad idea for those looking for growth, I'd make sure to keep an eye on its margins over the next few quarters. If it appears the company is stabilizing its cost structure, it might make sense to add to your investment. If not, I'd be tempted to move on.
I give RetailMeNot a big thumbs up.