6 Hot IPOs for the Second Half of 2011
If you want to gauge the current interest in initial public offerings (IPOs), then you simply need to look at the stock chart of social media firm LinkedIn (Nasdaq: LNKD). Right now, its stock is scorching hot, as investors seek out business models that possess robust growth prospects.
Judging by the numbers, the IPO market appears healthy. According to second-quarter data from Dealogic, bankers peddled 381 deals globally, raising more than $60 billion. A year earlier, they were able to price 334 deals, worth $43 billion. The recent market weakness threatened to make LinkedIn the last hot IPO of 2011 because bankers can’t generate deals when the market is tanking. But the markets finished with a bang in June, which should help set the stage for a continued slate of new IPOs.
Here are six companies to watch as they make their way to the starting gate.
1. Chrysler
It’s unclear whether the nation’s third-largest auto maker will seek to make its debut in the fourth quarter of 2011 or the first quarter of 2012. But one thing’s certain: the timing looks impeccable. Chrysler almost went out of existence during the recent economic downturn, and even Fiat’s capital injection looked insufficient to help the company right the ship. Market share kept eroding and its cars seemed completely out of date compared to models offered by rivals. Although Chrysler still has more work to do to rejuvenate its car line, its truck and Jeep divisions are starting to look very appealing. Recently-refreshed pickups and SUVs are getting top prices as demand continues to build. Auto analysts expect to see sales rise another 10% in 2012, which should help give this coming IPO a positive growth trajectory.
2. Groupon
This company was a great success story of 2010. Its group-based discounts quickly became popular, leading the company to go on a massive expansion of its workforce. Yet it’s unclear if this business model has long-term staying power, even though Groupon’s 263 page S-1 registration statement may take hours to get through. (An S-1 is a legal document filed by public companies to register their securities with the U.S. Securities and Exchange Commission (SEC), and is used by investors to research a company prior to an IPO.)
Rival platforms, including one that is being deployed by mighty Google (Nasdaq: GOOG), are taking aim at Groupon, and the market may soon become fragmented. This would spell real trouble because the Groupon model relies on lots of users to make sure enough consumers sign up for any particular deal. Indeed, rival upstart Livingsocial.com is already stealing some thunder and preparing for its own IPO as well.
3. Zynga
This maker of smartphone-based games such as Farmville and Cityville just filed its S-1 registration statement and could go public in the next month or two. Considering the company didn’t even exist a few years ago, you have to be impressed by a reported $235 million in revenue in the first quarter of 2011. Less impressive: net profit margins below 5%. This may be attributable to start-up costs because software-based businesses can generate impressive operating leverage as sales rise. But will sales rise? The company’s limited operating history should give you pause. In the world of gaming, yesterday’s winner can be tomorrow’s loser. The real test will be how many games the company has in its pipeline and how market share stands compared with rivals. A rumored IPO deal priced around $20 billion also seems quite lofty for such a Johnny-come-lately. (You can read Zynga’s S-1 here)
4. AMC Entertainment
AMC operates nearly 400 movie theaters, making the company the third-largest player in the industry behind Regal Cinemas (NYSE: RGC) and Cinemark Holdings (NYSE: CNK). These firms have all been able to push through steady price increases for movie tickets while only slightly denting traffic, even as other film options such as Netflix (Nasdaq: NFLX) continue to grow very quickly. Yet it’s unclear if the trend can be sustained, as “movie night” is becoming an expensive proposition for many families. Assuming further price increases will be hard to come by and assuming Netflix continues to grow more popular, it’s hard to see how AMC has any real growth prospects.
5. Carbonite
Looking for growth stocks? Check out this provider of remote online back-up services. Sales have doubled every year since 2006 and growth remains quite impressive. If you annualize first-quarter sales, then 2011 revenue should be up roughly 30% or 40% as well. The company, which filed an S-1 registration statement in May, is making small acquisitions to add more features like photo-sharing to its platform. Yet there is a dent in the business model. For every $3 in sales, the company is losing about $2. Management will need to make a clear and convincing case that Carbonite will eventually be on the path to profitability.
6. Frac Tech Holdings
This company filed for an IPO back in December but has yet to pull off a deal. Perhaps this is because it’s involved in the controversial energy extraction technique known as hydraulic fracturing (fracking). Concerns have risen that fracking contaminates ground water. A consensus appears to be emerging that the technique can be supported by all interested parties if tighter regulation is in place, including a clear disclosure of the specific chemicals being used. Indeed, the natural gas industry itself appears to support such a move. As a result, the backdrop for this long-awaited IPO has just gotten better.
Action to Take –> It’s already tough enough for investors to find growth. And with the market looking uncertain, it’ll likely be even tougher in the months ahead. This is why you should pay attention to these IPOs as they come down the pipeline. Each have their own unique challenges, but there may be a good opportunity to be had among this group.