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IPO Investors Are Being Very Selective

Fender's IPO about-face shows that sexy isn't enough these days


When Facebook (NASDAQ:FB) filed its IPO back in February, the buzz was that the market was poised for return to the go-go days of the 1990s. But of course, the deal turned out to be a dud. If anything, it’s a clear sign that the IPO market continues to be focused on fundamentals, not the sexiness of deals.

Just look at the dealmaking this week. It certainly looked like Fender Musical Instruments would be a red-hot transaction. The company is the No. 1 in market share for electric, acoustic and bass guitars in the U.S. Some of Fender’s legendary customers include Jimi Hendrix and David Gilmour.

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Yet this wasn’t enough to divert investors from the fundamentals. For the most part, there were concerns that the slowing global economy would have an impact. After all, how many people will keep buying expensive guitars? Well, it looks like Fender’s management failed to provide strong answer while on the roadshow, and it has pulled the plug on its IPO.

On the other hand, this week had several IPOs that performed extremely well. One is Palo Alto Networks (NYSE:PANW), which develops next-generation firewall security systems.

And yes, the company has been growing like a weed. From 2009 to 2011, revenues have gone from $13.4 million to $180 million. But Palo Alto is also generating strong cash flows. For the nine months ended April 30, they came to a hefty $58.5 million.

In light of all this, the demand for Palo Alto’s IPO was huge. The company raised its price range from $34-$37 to $38-$40 and priced the offering at $42. So far in today’s trading, the shares are at $56.

All in all, it’s an example of how IPO investors continue to be extremely selective. Actually, this morning I talked about this with Marcus Ryu, CEO and co-founder of Guidewire Software (NYSE:GWRE). He took his company public in late January.

According to him, IPO investors are definitely focused on the core business. “They are not concerned about superficial things like having a mobile or social strategy. They are instead looking for a company with strong fundamentals and a solid growth story.”

That’s just the way it should be.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO.  Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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