High-Tech IPOs Staging a Comeback
You can’t find much agreement on the health of the market for initial public offerings (IPOs) these days. Some experts see a resurgence of young companies going public, after 2 1/2 years of drought. Others say that a few deals are getting good publicity but that the overall market for new stock issues still is weak.
Here’s something no one can argue with: A lot of investors have made big money off high-technology company IPOs that have hit the market in recent months. And the second quarter could bring many more such deals.
Young high-tech companies have captured Wall Street’s imagination for the first time since 1987. Look at Sunnyvale-based Mips Computer Systems, for example. The computer systems designer went public on Dec. 22 at $17.50 a share. The price now: $24.
Another hot issue: Santa Barbara-based Digital Sound, which makes voice-processing and voice-mail equipment. It went public last week at $8.50 a share and has since jumped to $10.125.
The window of opportunity for high-tech firms to raise money via stock sales slammed shut--and stayed shut for long periods--several times in the 1980s. The pattern mirrored the computer industry’s booms and busts. Now, investors once again are intrigued with the promise of new high-tech products. Or perhaps a better way to put it is this: Investors are intrigued with funding promising high-tech companies so long as they think they’re getting bargains in the stocks.
Indeed, institutional investors, rather than individuals, are leading the rush into high-tech IPOs, and the institutions are very careful about what they’ll pay because they usually intend to hold the stocks for two years or so, experts say. High-tech firms that are successfully coming to market are asking stock prices that institutions consider good values relative to the companies’ earnings. “Prices have been reasonable,” said John Ballen, research director for Massachusetts Financial Services, a major Boston investor.
The flip side of the equation is that the high-tech firms believe big investors are being reasonable as well: From the companies’ perspective, investors are again willing to pay decent prices for growth stocks, said Dan Case, investment banking chief at Hambrecht & Quist in San Francisco.
For most of 1988 and 1989, many companies that boasted fast-growing earnings got scant attention from investors, who were too busy chasing junk bonds and other more exotic investments. Now, it’s back to basics in investing--good news all around.
What’s a reasonable valuation for a young high-tech company today? It varies, but price-earnings ratios overall are far lower on high-tech IPOs now than in previous booms, which indicates we’re still early in the IPO recovery. Exabyte, a maker of computer storage tapes, went public at $10 a share last October, or about 16 times the 62 cents a share it earned in 1989. The firm might have fetched 25 times earnings or more in the hot 1987 IPO market.
Ballen said he generally looks for IPOs priced at no more than 13 times estimated 1991 earnings: “If you see something at 20 times estimated 1991 earnings, you know you’re getting out of sight.”
Because that kind of pickiness on the part of big investors inhibits high prices in the IPO market, it’s a boon for individual investors who are buying the stocks now. Unfortunately, the rising institutional interest in high-tech stocks also is keeping many individuals shut out of IPOs. If the choice is between a big investor who wants 10,000 shares and 100 individual investors who each want 100, an investment banker virtually always will go with the institution.
In fact, Case warns individual investors that “if you can get your hands on an IPO (in the offering sale), I’d watch out”--it may be a bad bet.
Even if you’re closed out of a hot offering, you can buy a stock once it begins trading, albeit probably at a higher price. If your time horizon is long enough, that probably shouldn’t deter you: Exabyte rose from $10 at its October IPO to $13.125 in November. Then it hit $14 in January and now is at its highest yet, $15.625.
How long high tech will stay hot is anyone’s guess, but Case believes the high-tech resurgence is going to lead to a general IPO boom in the spring, assuming the stock market overall doesn’t collapse. “The second quarter is going to see the highest IPO volume since 1987,” he predicts.
Beyond Tech IPOs: Back to the argument over how much really is going on in IPO-ville: Roger Engemann, whose local money management firm runs the Pasadena Growth stock fund, has historically been an active IPO shopper. But he hasn’t bought an IPO in a year or so, he said.
Engemann shies away from high-tech issues. And beyond tech, “we just haven’t seen a lot of decent companies going public,” he said.
But there are some things in the pipeline now that may interest him, Engemann admits. One is Pinkerton’s Inc., the security services giant based in Van Nuys. It plans to go public in April, selling 2 million shares at $14 to $16 each. The proceeds will partly be used to reduce debt incurred when the company was taken private two years ago. It had been a division of American Brands.
Based on 1989 earnings of $1.14 a share, a $14 to $16 stock price would mean a price-earnings ratio of 12 to 14--a level that New Issues newsletter of Fort Lauderdale, Fla., calls “reasonable” for a stock that “offers the potential for steady capital gains in the years ahead.” (After all, if security isn’t a growth industry, not much is.)
Another non-tech offering that will be closely watched: Safeway Stores. Kohlberg Kravis Roberts & Co. wants to sell the public a 10% stake in Safeway, which KKR took private in 1986. A $13 to $16 offering is expected this month. The Safeway offering, if successful, may open the door for other LBO companies to go public again.
Gap Soars Again: Gap Inc., owner of Gap clothing stores, has been one of the hottest stocks this year. The shares have jumped to $59.25 on Thursday from about $47 in late January.
Gap’s fans on Wall Street say this surge is the beginning of investors’ reawakening to Gap’s status as a growth stock. The San Bruno company’s sales growth was white-hot from 1984 to 1987. Then retail sales slowed industrywide, and Gap’s earnings plateaued. Result: The stock plunged. It fell from a peak of $77.875 in the summer of 1987 to a ridiculously low $16 after the October, 1987, market crash.
Last year, consumers went shopping again, and Gap’s trendy clothes once again were favorites. Earnings jumped to $2.77 a share for the year, up 35% from 1988. Momentum hasn’t slowed: Thursday, Gap said sales in stores open at least a year were up 20% in February from a year ago.
Thomas Tashjian, analyst at Seidler Amdec Securities in Los Angeles, says Gap is in prime position to steal market share from other retailers as consolidation within the industry continues. And one of Gap’s most impressive attributes is something little discussed, he says: Compared to most retailers, Gap has a highly efficient supply system that keeps its store shelves filled even when sales exceed expectations.
Tashjian rates Gap a “buy” even after its latest jump. Dean Witter Reynolds analyst Don Trott also is pushing the stock. He sees it reaching the low $70s within 12 months.
TRACKING HIGH-TECH IPOs
How some high-tech companies’ initial public stock offerings of the past year have fared:
IPO Offering Thurs. Stock date price close Change Network General 2/03/89 $8 $22 +175.0% Knowledgeware 10/20/89 12 1/2 19 1/2 +56.0 Exabyte 10/19/89 10 15 5/8 +50.0 Laserscope 12/01/89 9 12 5/8 +40.3 Cognex 7/21/89 11 15 1/2 +40.1 Intera Information 2/16/90 9 3/4 13 5/8 +39.7 Mips Computer 12/22/89 17 1/2 24 +37.1 Hologic 3/02/90 14 17 3/4 +26.8 Digital Sound 2/26/90 8 1/2 10 1/8 +19.1 Sequoia Systems 3/05/90 9 1/2 8 7/8 -6.6 Exide Electronics 12/22/89 12 1/2 10 1/4 -18.0
Source: New Issues newsletter
GAP’S COMEBACK
After a slowdown in 1987-88, Gap Inc.’s profit surged last year and is expected to rise sharply again this year.
Revenue Stock price Year EPS (billions) range 1984 $0.36 $0.518 $5 7/8-$4 3/8 1985 0.81 0.647 15 7/8-5 1/8 1986 1.93 0.848 45 7/8-15 1/2 1987 1.95 1.06 77 7/8-16 1988 2.05 1.25 42 3/8-18 1/2 1989 2.77 1.58 61 1/2-35 3/8 1990** 3.55 1.86 59 1/4-46 3/8* 1991** 4.24 2.20
* year to date
** estimate
Source: Dean Witter Reynolds, Value Line
Investment Survey
