Contact: Brenon Daly
The IPO market is getting bigger by going smaller. Investors have shown they are ready to step in and buy shares of unprofitable companies that are still only generating revenue in the tens of millions of dollars. That has drawn a number of companies onto the IPO path that might have been termed ‘sub-scale’ in the recent past.
Consider the offerings – both planned and actual – from Rally Software Development, Marketo and ChannelAdvisor. All three companies finished 2012 with less than $60m in sales. Further, all three companies continue to run in the red – deeply in the red. (For instance, Marketo lost $34m in 2012 on sales of $58m. Rally doesn’t even turn an operating profit and ChannelAdvisor still runs at a negative ‘adjusted’ EBITDA.)
Not that the diminutive size or red ink hurt Rally on its Friday debut. The agile software development shop not only bumped up the size and price of its offering, but then shares, well, ‘rallied’ in the aftermarket. The stock changed hands at about $18 in mid-session trading, after pricing at $14 each.
When Rally set its range last week, we noted that the small-cap company wouldn’t necessarily be trading at the discount that typically gets assigned to that class of stocks. On a back-of-the-envelope (not fully diluted) basis, Rally has secured a valuation of roughly 6x trailing sales and 4x forward sales. With a healthy multiple like that, it’s small wonder that other small companies are lining up to hit Wall Street.
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