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The 3 Hottest Upcoming IPOs

The IPO market has cooled a bit but there are still many hot deals on deck.

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

Last week showed that the IPO market is far from perfect. All in all, the tech offerings were kind of mediocre. This was definitely the case with King Digital Entertainment (KING), whose stock plunged 19%. The company is the developer of the Candy Crush Saga game.

KingDigital185But corrections are normal and healthy for IPOs. After all, the market has had a big run. According to Renaissance Capital, 63 deals have come to market this year and the amount raised has come to a hefty $10.6 billion. The average return was 19%.

Yet with the overall market indices in the bull mode, there should still be many hot IPOs in the coming months. So here’s a look at 3:

Arista Networks (ANET)

Arista 185Terms: N/A
Estimated Offering Date: N/A
Underwriters: Morgan Stanley (MS), Citi (C), BofA Merrill Lynch (BAC), Barclays (BCS), Credit Suisse (CS), Deutsche Bank (DB) and RBC Capital Markets

Founded a decade ago, Arista is now one of the world’s top providers of next-generation networking switches. The company is gunning for the massive market that is dominated by operators like Juniper Networks (JNPR), Brocade Communications (BRCD) and Cisco (CSCO).

And growth has been on fire. From 2010 to 2013, revenues shot up from $71.7 million to $361.2 million, while earnings went from $2.4 million to $42.5 million. The company has benefited from the cloud-computing wave. In fact, there are now more than 2,300 customers, which include biggies like Facebook (FB), Disney’s (DIS) ESPN, Yahoo! (YHOO) and Microsoft (MSFT).

It certainly helps that Arista has three legendary founders:

  • Andy Bechtolsheim: He was one of the masterminds of Sun Microsystems back in 1982. He then went on to start Granite Systems, a developer of high-speed network switches. The company was eventually sold to Cisco.
  • David Ross Cheriton: He is a computer science professor at Stanford. But he was also a co-founder of Granite Systems and was even one of the original seed investors in Google (GOOG), along with Bechtolsheim.
  • Kenneth Duda: From 1999 to 2004, he was the chief technology officer of There, which was a virtual world company. Before this, he was the lead developer in Cisco’s Gigabit System Business.

With such a team, how could anything go wrong? Well, as is typical in tech land, there has been some tension. According to the S-1, Optumsoft is alleging violations of a licensing contract for the use of its technology in the Arista platform. The interesting twist is that the company is owned by Cheriton!

Yes, it’s kind of messy. But this is normal stuff. Besides, there is no lawsuit filed. So it seems reasonable that the parties should come to an agreement. After all, Cheriton is the No. 1 shareholder in Arista.

Paycom Software (PAYC)

Paycom 185Terms: 6.6 million shares at a range of $18 to $20
Estimated Offering Date: March 10th
Underwriters: Barclays and J.P. Morgan (JPM)

Oklahoma City is far from Silicon Valley. But that hasn’t mattered much for Paycom. The company has become a hot player in the fast-growing cloud computing industry. The focus is on providing HCM (human capital management) services like payroll, recruitment and talent management.

The company is a pioneer in the space, having gotten its start back in 1998. But over the past three years, growth has been robust. During this period, revenues have jumped from $57.2 million to $107.6 million and net income has gone from $1.4 million to $7.7 million. Paycom has more than 10,000 clients and none of them represent more than 0.5% of revenues. The client retention rate is about 91%.

No doubt, the HCM industry opportunity is massive. According to IDC, it is expected to account for $22.5 billion in spending on software for 2014.

It also helps that other cloud operators in the industry have done extremely well. One is Workday (WDAY), whose stock is up 226% since its IPO back in late 2012.

Weibo (Ticker pending)

Weibo 185Terms: N/A
Estimated Offering Date: Sometime in April
Underwriters: Goldman Sachs (GS) and Credit Suisse

This is essentially the Twitter (TWTR) of China. Users can post 140-character messages and also attached photos and videos.

Weibo got its start back in August 2009 and the traction was immediate. As of now, there are 129.1 million monthly active users, which compares to Twitter’s 241 million MAUs. Weibo is also heavy on the mobile side. About 70% of MAUs access the service from smartphones and feature phones.

In terms of the financials, the company’s revenues have been surging. From 2012 to 2013, they skyrocketed from $65.9 million to $188.3 million. There was also a drop in the net loss, from $102.5 million to $38.1 million.

But expect the momentum to continue, at least in the short run. Part of this will be from the expansion of the user base (of course, China is huge!) But Weibo has yet to really tap the mobile potential. Consider that this part of the business represents only 22% of overall revenues. Actually, the company did not start selling mobile ads until Q2 2013.

It’s true that China can be a dicey market, especially for services that rely on user-generated content. But it looks like Weibo has benefited from its majority owner, Sina (SINA), which has had a long history in dealing with the governmental nuances.

Finally, Weibo got a nice boost from Alibaba, which invested $585.8 million in the company last year. With this, Alibaba has been funneling traffic to Weibo as well as providing some nice monetization opportunities.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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