Want to get rich quick? Invest in a technology IPO.
According to Dealogic, the average tech IPO in 2013 surged a stunning 41% in its first day of trading. The most impressive one-day gain came from Benefitfocus (Nasdaq: BNFT), which was priced at $26.50 when the deal was launched Sept. 23 and managed to close above $53. (Perhaps tellingly, shares have risen just 5% since then.) Twitter's (NYSE: TWTR) 73% pop in its first day of trading was also quite impressive.
The IPO market lifted many sectors last year, not just technology. The health care sector, led by biotech stocks, generated nearly $10 billion in IPO proceeds through roughly 50 deals, according to Dealogic. More than a dozen deals in the energy sector raised nearly $10 billion.
Now that investment bankers are returning from their Caribbean villas, they're gearing up for another banner year. According to CB Insights, there are more than 500 privately held tech companies that are believed to be already worth more than $100 million.
The 10 most anticipated IPOs of 2014 include:
This Chinese e-commerce giant, which conducts more than $150 billion in transactions a year, is deciding whether to seek a listing in Hong Kong or the U.S. A recent move to extend its borrowing capacity has bought Alibaba more time, leading some to assume that any IPO plan won't emerge until the second half of 2014.
The deal can't come quickly enough for executives at Yahoo (Nasdaq: YHOO), which took a stake in Alibaba back in 1995 that now stands at 24%. An eventual IPO would reap tens of billions of dollars for Yahoo. (The Economist suggests that Alibaba's value may exceed $100 billion).
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This provider of quick-to-expire instant messages is playing coy. It's clear that firms such as Facebook (Nasdaq: FB) or Yahoo would love to snap up Snapchat, just as they acquired Instagram and Tumblr in recent years. (Facebook allegedly made a recent $3 billion offer that was rebuffed by Snapchat.) These large, established firms need to keep acquiring hot and trendy services to help them maintain a cutting edge image. But Snapchat appears to be seriously considering an IPO instead. The company recently raised $50 million, which buys the time needed to fully contemplate a go-it-alone strategy. Perhaps Facebook or Yahoo will eventually make Snapchat an offer it can't refuse.
I used this company's payment technology three times over the holidays. The bar and restaurant owners I spoke to love the simplicity of the service. Square gets a 2.75% cut of every transaction it processes, though Visa (NYSE: V) and MasterCard (NYSE: MA) end up with the majority of those transaction fees. Those firms were wise enough to be early investors in Square, giving them the leverage to demand generous back-office support terms. This deal is also expected to emerge later in 2014.
This was supposed to be one the hottest IPOs of 2013, but it never happened. This provider of social-sharing services (also known as scrapbooking) has garnered a cult following among its loyal users and also among its venture capital backers. A 2012 financing round pegged Pinterest's value at $1.5 billion, and a 2013 investment now values the company at $4 billion.
The problem with such lofty valuations is that they can hamstring bankers as they seek to bring a company public. Pinterest's valuation will need to exceed $4 billion to benefit the most recent round of investors, which may be a tough sell. As a point of reference, Facebook paid $1 billion to buy Instagram, and Yahoo paid a similar amount to acquire Tumblr. As is the case with Snapchat, Pinterest has barely generated any revenues thus far.
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5/6. Box and Dropbox
These firms both provide cloud-based storage and collaboration services, and both are inching closer to an IPO. Box's offering is expected to come in the next few months. Box is currently valued at around $2 billion, and its bankers may downplay the fact that Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG) and other big firms are making a very big push in cloud storage. Rival Carbonite (Nasdaq: CARB), which went public in 2011, has underwhelmed the investing public with a market value of just $310 million. Dropbox, which is now valued at around $8 billion based on a recent financing round, is valued at an alleged 40 times trailing sales.
This company has already filed an IPO plan with the SEC and you can expect to see a deal priced some time in the first quarter of 2014. Care.com acts as a match maker for parents and pet owners with nannies, baby-sitters and pet-sitters. The site already has nearly 10 million members, and IPO proceeds are expected to help build the brand and that user base.
This provider of data storage faces an uncertain IPO market. Some recent data storage IPOs, such as Violin Memory (Nasdaq: VMEM), have fared quite poorly. But Actifio appears to be gaining solid traction, with an automated storage system that greatly reduces hardware and staffing requirements. This company may never even make it to the IPO starting line, if larger tech firms such as EMC (NYSE: EMC) make a move to acquire it.
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This provider of Web-based coupons has been around since the dot-com era but was likely emboldened to pursue an IPO after seeing the impressive post-IPO gains for rival RetailMeNot (Nasdaq: SALE), which my colleague Dave Goodboy profiled recently. That firm's shares were priced at $21, finished its first day of trading at $28, on its way to $38 a few months later. The spurt of euphoria has ended and shares are now drifting back into the $20's.
One of the challenges for Coupons.com's IPO is its longevity. Any firm that has already been around for 15 years can't lay claim to explosive growth prospects. The company's current $2 billion valuation may prove to be a tough sell, as it already exceeds RetailMeNot's valuation by more than 30%.
I'm a regular user of VacationRentalByOwner.com (VRBO) and AirBnB.com. While the first site is already operated by a public company, HomeAway.com (Nasdaq: AWAY) (with a $3.45 billion market value), AirBnB has thus far avoided the urge to public. If AirBnB chooses to go public this year, look for a very rich valuation. While HomeAway had around $350 million in sales in 2013, one blogger thinks that AirBnB's revenue base is twice as large. Moreover, the automated nature of the company's business model means that it is likely very profitable.
Lastly, investors should know that many hot IPOs eventually peter out, so it pays to track these firms to see if you can get a better entry point down the road. As an example, investors in Big Data firm Splunk (Nasdaq: SPLK) were well served by waiting for the company to hit a temporary post-IPO rough patch before pouncing.
Risks to Consider: As I noted a few weeks ago, the only time you should seriously consider investing an IPO is when you can get in on the offering price. These stocks often open for trading far above the offering price, which makes it hard to spot a good entry point.
Action to Take --> Part of the charm in tracking new IPOs is the assessment of the impact on valuation for publicly traded rivals. For example, if AirBnB's IPO will be as popular as I anticipate, it will become so richly valued that it will make rival HomeAway.com seem like a true bargain. Then again, if a firm like Coupons.com has a poorly received IPO, it could spell trouble for publicly traded rival RetailMeNot, which might starts to appear relatively overvalued.