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Never before have economic forces conspired to trip up the investor chomping at the bit for a great IPO. At least, that’s the case for the average investor. We have pierced the veil of uncertainty in 2008 to reveal a Triple Crown of IPO front-runners. Be forewarned: 2008 will not be the slam-dunk we saw in 2007. Last year, IPOs soared around the world. In fact, the IPO markets were downright explosive in places like Asia, Brazil and India. But the sure-thing mentality of grabbing a hot IPO in an emerging market may be last year’s news. The American credit crunch, the plunging dollar and the biggest U.S. deficit in history have all sent shockwaves through the global IPO marketplace. The U.S. credit crisis has killed $21.1 billion worth of new IPOs this year alone, according to Thomson Financial. Overall, 61 global IPOs were shelved in the first two months of 2008 as the pipeline dried up over credit concerns. Rather than embrace risk, investors have hunkered down -- risk-averse, confused and gloomy.
Instead, the commodities boom can provide equal or superior returns over the typical IPO. Precious metals, grains and oil have in many cases displaced IPOs for adventurous investors. Still, there is money to be made in IPOs this year. Here are three front-runners we consider to be good bets… IPO Investing: Triple Crown Pick #1: The Major-Domo Our first, and perhaps safest, pick of our Triple Crown is poised to become the biggest IPO in history. Visa, Inc. said its IPO filings that it could raise up to $19 billion, setting a record in the annals of the IPO chronicles. The Visa IPO is expected to surpass the $10.6 billion IPO AT&T Wireless raised in 2000. And if demand is strong as expected, Visa’s IPO could be almost as big as the two largest IPOs combined: AT&T Wireless and Kraft Foods’ $8.7 billion offer in 2001. The credit crunch that paralyzed so many markets is a shot of adrenaline for the biggest credit-card processor in the world. Visa is by far the largest U.S. card company by market share. Visa’s number of transactions and dollar amounts outpaced those at MasterCard and American Express in 2006. If you want to take the pulse of a Visa IPO, look no further than its No. 1 competitor, MasterCard. Shares of MasterCard have risen fivefold since its IPO, trading at more than $200 each.
In the biggest IPO offering since 2004, MasterCard raised $2.4 billion in 2006. Investors who jumped onto that IPO saw gains of more than 450%. Our initial research went bullish on the MasterCard IPO, and as a result, subscribers of our Diligent Investor advisory ended up with gains of 259% in only one year, averaging 22% gains every month on their investment. It’s very possible you could do even better with Visa… Visa’s 60% market share is about as close as you can get to a monopoly. By comparison, MasterCard has about a 20% market share and it more than tripled in its first year of trading. IPO Investing: An Established IPO Visa has amassed the biggest retail electronic payments network in the world. According to its filing of September 30, 2007, Visa issued 1.5 billion Visa cards. The company’s payment processing network is by far the largest in the U.S. Last year, the company processed 44 billion transactions, totaling $3.2 trillion, in 2006. MasterCard processed 23.4 billion transactions, totaling $1.9 trillion, in the same year. Visa will be the last of the major American card companies to offer stock to the public. Discover Financial Services went public last July, and its shares have since plunged. But Discover, like American Express, is a true card lender. As intermediaries in the credit-card transaction, the responsibility for Visa and MasterCard cardholders' debt is held by the banks that issue them. Visa is a direct beneficiary of revolving credit that has risen more than 11% as of November 2007, as compared to the 6.1% of 2006 and the 3.1% of 2005. And Visa also rakes in fees from credit-card debt that has ballooned to $790 billion, rising at a "rate four times higher than earlier in the decade," reported the Center for American Progress. And when you look at emerging markets, the Visa story gets even better. A 2006 study by KPMG quantified the enormous investments underway by major corporations targeting consumers in emerging markets. Consider for example that by 2010, India is expected to overtake major European markets to become the fourth-largest grocery market in the world whose value will more than double by 2020 to $482 billion, according to the study. KPMG also points out that the use of credit cards in Brazil surged 40% in 2005 from 2004 and almost 200% from 1999, as the country’s middle class continues to expand. And in China, more than 400 of the world’s 500 largest companies are already in the mainland market and several have topped $1 billion in annual revenue. These vast emerging markets, and others in the process of ramping up, all present enormous revenue opportunities for Visa -- and its investors.
IPO Investing: Triple Crown Pick #2 - Free-Love Software Open-source software is not a company. It is a principle of developing software in which people from around the world contribute to its genesis and evolution without pay. In turn, this software is available free of charge to anyone who wants it. The core belief of open-source software engineers dates back to the Summer of Love, when the counter-culture movement saw free as a market dynamic that “sticks it to the man.” In this case, “the man” is Microsoft. While open-source developers won’t topple Microsoft any day soon, the software behemoth is looking in its rearview mirror. IPO Investing: The Halloween Memos Microsoft’s infamous Halloween memos revealed that open-source software “poses a direct, short-term revenue and platform threat to Microsoft, particularly in server space. Additionally, the intrinsic parallelism and free idea exchange in [open-source software] has benefits that are not replicable with our current licensing model and therefore present a long-term developer mindshare threat.” Echoing that sentiment, Harvard Business School professors Pankaj Ghemawat and Ramon Casadesus-Masanell said that because users of open-source software can directly revise the code (without concerns about license restrictions), the development cycle is significantly shorter and cheaper -- undercutting the lucrative fees Microsoft and other companies collect for patches, maintenance and upgrades. IPO Investing: IPOs for Free Software? So how can you capitalize on free software? Well, there are companies that take open-source code and charge to support it. In addition, they build proprietary software that runs very well on top of open-source software, such as the Linux operating system. Several technology companies have actually become quite successful in Linux by enhancing the software and then supporting it in ways that are very attractive to large corporations. Red Hat was the poster child for open-source IPOs. In its 1999 debut, stock in this Linux company tripled on the first day of trading. Over the years, the stock saw it ups and downs, but today it is a $4 billion company,- making open source a real and sustainable business model. IPO Investing: Two IPOs in the Limelight That said, all eyes were on MySQL for a hot IPO in 2008. It commercialized an open-source database currently used by Google, YouTube, Facebook and other Internet-intensive operations. MySQL was queued up for a highly anticipated IPO… when, out of the blue, Sun Microsystems came in and scooped it up for $1 billion in mid-January. With MySQL off the market, two other open-source IPOs are now in the limelight. One of them is Ingres. On the surface, Ingres appears as a competitor to MySQL. In reality, it addresses different market segments. Ingres’ annual revenues are approaching $100 million, and the company is cash flow positive. Initial expectations pegged an Ingres IPO for this summer. But Sun’s $1 billion acquisition could impact that timetable. If Ingres’ investment bankers believe the company is worth $1 billion or more, they could move it up. Or, if $1 billion is viewed as a fire-sale price, the IPO could be delayed until the market is ready to cough up a better valuation. Either way, the Ingres IPO is certainly worth monitoring. IPO Investing: A Sweet Software IPO The other open-source IPO to look for this year is SugarCRM. (The CRM stands for customer relationship management.) This is a big market for companies that want to automate sales and customer support. The worldwide CRM software market in 2006 generated just under $3.6 billion in license revenue alone, according to market researcher Datamonitor. Those revenues are expected to reach $6.6 billion by yearend 2012 -- a compound annual growth rate of 10.5%. SugarCRM is often considered an open-source version of SalesForce.com, the market leader whose stock went public in June 2004 at $15.80 and now trades in the high $50s. SugarCRM’s customers include H&R Block, Men’s Warehouse, the State of Oregon and other groups of varying size. Some reports suggest that the company is already cash flow positive. Revenue for 2007 was expected to double to $15 million, according to Reuters, and revenue targets were set at $25 million or more. Since SugarCRM recently raised a Series D funding of $20 million from the investment community, the company may not be pressed for cash, delaying this year’s IPO. But if the climate is favorable, SugarCRM could make its debut in 2008. IPO Investing: Triple Crown Pick #3: Follow the MoneyOn December 17, 2007, the National Venture Capital Association (NVCA) predicted that CleanTech IPOs will be big moneymakers in 2008. Most respondents to the NVCA survey agreed that the highest growth is expected to come from CleanTech, which 80% of the respondents predict will attract venture financing in 2008. IPO Investing: This IPO Gained 285%The NVCA respondents are more than prescient. For example, the best-performing IPO last year was JA Solar Holdings Co., a small solar-cell maker from China. JA Solar gained 285% last year. Chinese solar IPOs and new issues enjoyed an absolute boom in 2007. First Solar skyrocketed more than 800%, while Ascent Solar and Hoku Scientific jumped nearly 350%. SunPower rose 252% last year and Suntech Power jumped 144%. On a broader base, CleanTech outperformed the major indexes if you look at the CleanTech Group’s CleanTech Index (CTIUS). It posted a 42.9% return for the year.
A convergence of growing government subsidies -- and a certain inevitability by consumers about alternative energy -- are boosting the viability of CleanTech investments. Sure CleanTech stocks will ride a roller coaster for a while, but that should be expected from a market that is still rather new. Longer term, CleanTech could pay off just like Big Oil does today. That turning point will come when investors are able to isolate the better-performing stocks from the sector as a whole. It’s conceivable we could start to see that in 2008-2009. If you want to learn more about how you could possibly rake in triple-digit gains from today's IPO Boom, access our Special report: The "Secret IPO Fund".
Originally published March 13, 2008. Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. |
