Contact: Brenon Daly
It appears that Wall Street is ready to play small ball in the IPO market. Rally Software Development has set the range for its upcoming offering, which will land it squarely in the realm of small-cap stocks. The agile software development shop put its expected pricing at $11-13. Assuming Rally does come to market at that level, it will debut at a valuation of less than $300m.
Typically, companies that garner valuations in the low hundreds of millions of dollars on the market get overlooked by most institutional investors. Without big-money buyers on Wall Street, small-cap companies often trade at a discount to their larger brethren. (Some executives of smaller companies, frustrated by the valuation disparity, jokingly describe their place on Wall Street as ‘purgatory.’)
However, it doesn’t appear that Rally will necessarily be starting life at a discount. The company generated some $57m of revenue in the year that ended in January, meaning it will likely be trading at about 5-6x trailing sales and maybe 4x this year’s sales. (Rally has increased sales roughly 39% in each of the past two years. Assuming that rate ticks down slightly this year, the company could still put up about $75m of sales.)
Clearly, Rally – along with its five underwriters, led by Deutsche Bank Securities and Piper Jaffray – has done a good job telling its story to investors. And it certainly doesn’t hurt that both the broader equity markets are at all-time highs and the tech IPO market has been rewarding new issues. Both of the two previous tech IPOs (Marin Software and Model N) priced above their expected ranges and have traded up in the aftermarket.
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