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Cloud’s Cruddy Deals Teach a Lesson in IPO Patience

Investors hit the 'reset' button on the sector's valuations


Cloud computing might be one of the most-hyped technologies in 2012, and that’s been reflected a bit in the IPO market, where shares of Workday (NYSE:WDAY) are up 85%, and ServiceNow (NYSE:NOW) has posted a gain of 69% since coming public.

However, a swath of companies haven’t been able to push the needle since their deals — and that provides us a quick lesson about the IPO market.

A look at some of the most notable cloud flops so far this year:

Company Ticker IPO Date IPO Price Current Price Return
Proofpoint PFPT 4/19/12 $13 $10.38 -20%
Bazaarvoice BV 2/23/12 $12 $9.71 -19%
Brightcove BCOV 2/16/12 $11 $9.76 -11%
Millennial Media MM 3/28/12 $13 $13.05 0%
ExactTarget ET 3/21/12 $19 $20.00 +5%

Of course, keep in mind that all these IPOs saw price spikes when they hit the market. If you look at the returns compared to their highs, the results are downright awful:

Company High Price Current Price Return
Brightcove $25.50 $9.76 -62%
Bazaarvoice $21.10 $9.71 -54%
Millennial Media $27.90 $13.05 -53%
Proofpoint $17.75 $10.38 -42%
ExactTarget $29.88 $20.00 -33%

At the highs, the price-to-sales ratios for these cloud stocks hit nosebleed levels, not to mention there was a wide divergence among them (from 5.39 to 11.71).

Company Projected 2012
Brightcove $87 million 8.11 3.10
Bazaarvoice $164 million 7.99 3.68
Millennial Media $182.5 million 11.71 5.48
Proofpoint $105.4 million 5.39 3.13
ExactTarget $288 million 7.06 4.51

Now, they’re mostly consistent, with the exception of Millennial Media — and MM is growing at a torrid rate, with sales spiking 88% in its most recent quarter.

Not that this type of price action is anything new in the IPO market; many stocks see a honeymoon period. But when companies can’t continue the momentum, substantial price drops are usually right behind.

It’s easy to get sucked into the hype cycle. Just look at how investors rushed to buy hot companies like Groupon (NASDAQ:GRPN), Facebook (NASDAQ:FB) and Zynga (NASDAQ:ZNGA). For those who held onto their positions, the results have been gruesome.

Again, while Workday and ServiceNow might provide evidence to the contrary, individual investors usually are best served by waiting a couple quarters before buying into an IPO. That will give the company time to become seasoned, and the market can get a better hold of the valuation.

You might miss out on a couple of home runs, but more often than not, you’ll be sparing yourself some big whiffs.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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