Can You Really Make Money On IPOs?

April 23, 2008

Can You Really Make Money On IPO's?

All the publicity and cheerleading about IPOs might lead the average person to conclude they are a "can't miss" proposition. Just plunk your money down, wait a few days or few weeks and harvest the inevitable riches.

Being skeptical, even cynical, is virtually a job requirement around here. Everyone here enjoys happy news as much the next person, we just need more actual data before parting with our hard-earned money.

In 2007, we surveyed the Silicon Valley-centric IPO from 2006. (Whenever our eyes glaze over from trying to read too many numbers, we sometimes skip the data and just read the intermediate and final conclusions. Don't feel badly if an urge to do the same strikes here ;=)

As of January, 2007 the results were:

Company Date Raised Change Value Change
Smart Modlr 02/03/06 $184M +58% $106.7M
Cardica     02/03/06 $35M -54% -$18.9M
Alexza Phar 03/08/06 $44M +34% +$15.0M
Nextest Sys.03/22/06 $76M -34% -$25.8M
CPI Int'l. 04/28/06 $127M -17% -$21.6M
Techwell    06/21/06 $50M +84%   +42.0M
Shutterfly  09/29/06 $87M   -7%   -$6.1M
eHealth     10/13/06 $70M -12%   -$8.4M
Globalstar 11/02/06 $128M -21%  -$26.9M
Hansen Med. 11/15/06 $75M   -5%   -$3.8M
Affymax     12/15/06 $93M +0.5%   +0.5M

Expressed this way, the math is a little complex. In short, investors plunking $10K on each of these IPOs was up +5.4%. A bit better than T-bills at the time...

But everybody's a buy-and-hold investor, right? Holding these IPOs another year to January, 2008 found:

                IPO   Jan12'08
Company        Price    Price   Net
Smart Modular   $9.00   $9.40   +4.4%
Cardica        $10.00   $9.96   -0.4%
Alexza Pharm.   $8.00   $7.62   -4.8%
Nextest Sys.   $14.00 $19.82 +41.6%
CPI Int'l.     $18.00 $14.41 -19.9%
Techwell        $9.00   $9.98 +10.9%
Shutterfly     $15.00 $21.55 +43.7%
eHealth        $14.00 $35.00 +150.0%
Globalstar     $17.00   $8.06 -52.6%
Hansen Med.    $12.00 $25.52 +112.7%
Affymax        $25.00 $22.65   -9.4%

A $10,000 investment on the IPO date in each stock gained an investor +11.5%. Wow! That's ~5.75% per year over nearly two years. T-bills are down to what, 0.75% by then, so that seems really attractive.

A "buy and hold" investor, however, wants to own these stocks for the really long haul.

If so, the results as of last week were:

                IPO   04/18/08
Company        Price    Price   Net
Smart Modular   $9.00   $5.85  -35%
Cardica        $10.00   $7.32  -28%
Alexza Pharm.   $8.00   $6.75  -16%
Nextest Sys.   $14.00 *$20.00 +43% (*= buy-out price)
CPI Int'l.     $18.00 $11.18 -38%
Techwell        $9.00  $11.06 +23%
Shutterfly     $15.00 $14.60   -3%
eHealth        $14.00 $26.99 +93%
Globalstar     $17.00   $3.52 -79%
Hansen Med.    $12.00 $15.18 +27%
Affymax        $25.00 $13.62  -46%

Suddenly, the market taketh away. In the space of a little over 90 days, 2006 IPOs went from up +11.5% to down -6.2%!?!

Likewise on 2007 IPOs:

Offer 12/26/07
Company Date Price Price Net

3PAR 11/16/07 $14 $10.06 -28%

Accuray 02/08/07 $18 $16.73 -7%

Aruba Ntwks 03/27/07 $11 $13.58 +23%

ARYx Thera. 11/07/07 $10 $8.52 -15%

BigBand Ntwks 03/15/07 $13 $4.37 -66%

BioForm Med. 11/07/07 $8 $6.55 -18%

Cavium Ntwks 05/02/07 $13.50 $19.36 +43%

Data Domain 06/27/07 $15 $21.94 +46%

DemandTec 08/09/07 $11 $16.50 +50%

Glu Mobile 03/22/07 $12 $5.02 -56%

GSI Tech. 03/29/07 $5.50 $2.61 -53%

Infinera 06/07/07 $13 $11.51 -11%

Jazz Pharm. 06/01/07 $18 $14.64 -19%

Map Pharm. 10/05/07 $12 $15.03 +25%

NetSuite 12/20/07 $26 $27.28 +5%

NeurogesX 05/02/07 $11 $5.71 -48%

ShoreTel 07/03/07 $9.50 $5.09 -46%

SuccessFactrs 11/20/07 $10 $9.26 -7%

SuperMicro 03/29/07 $8 $9.06 +13%

Veraz Ntwks 05/05/07 $8 $5.08 -37%

VMWare 08/14/07 $29 $74.50 +157%

Xtent 02/01/07 $16 $8.60 -46%

Classically, "hot" IPOs such as VMWare are simply not available to the average investor until after the Meg Whitmans and Scott McNealys got their shares-- at the IPO price. As a result, most of the first day's move was only available to the privileged few, who (sarcasm alert) of course, saw no conflict of interest in accepting a gift from an investment bank who would later try to sell their companies financial services.

Assuming you got in on the VMWare IPO, your 2007 IPO investments were painful net -4.3% by late in 2007. (Your net was a trylu awful -11.5% if you missed VMWare.) Not only did you lose money, but you tied up a lot more of it spread across 22 IPOs in 2007 instead of only 11 IPOs in 2006.

Better still, as of April 18, 2008 your 2007 IPO performance is:

Offer 04/18/08
Company Date Price Price Net

3PAR 11/16/07 $14 $6.89 -51%

Accuray 02/08/07 $18 $7.43 -59%

Aruba Ntwks 03/27/07 $11 $5.22 -53%

ARYx Thera. 11/07/07 $10 $6.50 -35%

BigBand Ntwks 03/15/07 $13 $7.27 -33%

BioForm Med. 11/07/07 $8 $5.22 -35%

Cavium Ntwks 05/02/07 $13.50 $17.76 +32%

Data Domain 06/27/07 $15 $21.99 +47%

DemandTec 08/09/07 $11 $7.68 +30%

Glu Mobile 03/22/07 $12 $4.61 -62%

GSI Tech. 03/29/07 $5.50 $3.21 -42%

Infinera 06/07/07 $13 $15.31 +18%

Jazz Pharm. 06/01/07 $18 $8.78 -51%

Map Pharm. 10/05/07 $12 $13.42 +12%

NetSuite 12/20/07 $26 $21.07 -19%

NeurogesX 05/02/07 $11 $3.64 -67%

ShoreTel 07/03/07 $9.50 $5.13 -46%

SuccessFactrs 11/20/07 $10 $10.21 +2%

SuperMicro 03/29/07 $8 $7.46 -7%

Veraz Ntwks 05/05/07 $8 $2.79 -65%

VMWare 08/14/07 $29 $58.47 +102%

Xtent 02/01/07 $16 $4.90 -69%

Today the net on 2007 IPOs is -20.5%! (Even -25.1% if I missed out on VMWare!!)

Conclusion: 2007 IPO performance is now clearly in bear market territory.

The wretched performance of these 2007 IPOs is eerily similar to IPOs arriving late in the 2000 dot-com boom. Can there be any doubt a significant portion of 2007's IPOs were rushed out as the investment bankers saw the overall stock and credit markets weakening?

Having ignored all these stocks, and anything similar, for some time now, I feel better and better about my investment strategy every day.