A Ruckus of an IPO
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When Ruckus Wireless (NYSE: RKUS) went public in mid-November, the stock immediately crashed from an opening price of $15 all the way to close at $12.25 for an 18% loss on the initial day. A month later the stock has soared to a high of $20 highlighting the issues with the IPO market.
The market for IPOs remains as arcane as decades ago with institutional investors blocking out individual investor access to these offerings. After the Facebook debacle in May, Ruckus is another prime example of the issues with a market that isn’t open to every investor. Along with the recent SolarCity (NASDAQ: SCTY) IPO last week, the prices continue to gyrate wildly suggesting underwriters aren’t finding valid market prices before opening the stocks for trading.
Ruckus provides Wi-Fi equipment to help phone companies offload data traffic from overcrowded cellular networks to higher-capacity Wi-Fi. It jumped after the IPO over hopes of a Cisco Systems (NASDAQ: CSCO) buyout and more confide nce in the general investment thesis of growth technology firms.
So What Happened With The IPO?
How in the world did this stock price at the high end of the offering range to only plunge below the low end at the close? Clearly it didn’t help that the market was weak mid-November, but that explains the low-end closing price and not how the pricing was so strong.
Ironically the underwriters priced the stock at the upper end of the range of $13 to $15. The company raised $105 million in gross proceeds by offering 7 million shares. Selling shareholders sold 1.4 million shares as well. The company got the maximum proceeds instead of leaving money on the table for the institutional investors to collect.
The apparent answer is that the offering attracted a bunch of traders that flipped the stock once it quickly broke the offering price. The lack of long-term holders in effect caused a one-day panic.
Is Cisco Buyout A Real Option?
Since investors should never buy stocks based solely on buyout potential, this idea is actually a scary investment thesis. The stock now has a $1.5 billion market cap suggesting Cisco would have to be willing to pay a scary premium to fundamentals in order to snatch up the stock.
Right after the IPO, Cisco actually purchased a fellow competitor in the Wi-Fi sector in Meraki Networks that focuses more on the technology requirements of mid-sized businesses. The $1.2 billion deal helped hold Ruckus down originally as investors feared stronger competition from the behemoth.
Later in the month, Cisco made it clear that mergers remained on the radar. Since Ruckus fits into an area that it once dominated, that announcement helped provide a catalyst for the stock. A purchase of either Aruba Networks (NASDAQ: ARUN) or Ruckus could place Cisco back in a leadership position. Considering Meraki has only reached a $100 million bookings run rate, the purchase is considerably smaller than the $620 million and $212 million revenue expectations for Aruba and Ruckus, respectively.
Naturally analysts expect substantial growth after the company reported sales that nearly doubled in the nine months prior to the IPO. Revenue is expected to further expand by 30% in 2013 to $277 million. Investors need to note that forecasted earnings are expected to drop to $0.17 in 2013. That is a substantial drop after solid growth in 2012 though it appears the reported numbers include a substantial tax credit.
The market isn’t likely to absorb these declining earnings in a positive manner for a new tech IPO whether real or not. The perception will be the key; hence the first earnings report is always crucial and dramatic to a newly public company.
Computerweekly.com provided a great summary of a recent win at Marson’s, a UK pub with over 2,000 locations. Within two days of starting a test, the pub saw 50% of sales on a tablet-based system using Wi-Fi. Any time a technology can rip out an established provider within a limited test period attests to the quality and robustness of the service provided.
As mentioned above, alert individual investors denied access to the arcane IPO process could’ve benefitted from waiting to the after markets to buy. The stock has provided a 50% gain in a month to those investors.
Unfortunately, this stock is a rare example where the privileged got a raw deal, if one can even claim that considering the current price provides a nearly 30% gain to the IPO buyers.
The recent SolarCity IPO also allowed quick investors to obtain a better deal than the expected pricing range, yet the large funds got the best price. The stock priced substantially below the expected range at $8 and rallied all day to close at nearly $12.
One has to wonder if all potential investors were allowed into the IPO market if these stocks would price closer to where the stocks trade in the aftermarket.
Investors in IPO stocks clearly need to be alert these days, as the prices derived by underwriters are not anywhere close to reflective of the aftermarket demand. Ruckus plunged 18% and SolarCity soared over 50% in the first trading day. After the Facebook debacle, the IPO market appears worse than ever with no clear market friendly changes on the horizon.
As far as Ruckus, the stock appears to have reached the upper limits of attractive valuations. The limited earnings expectations for 2013 place this stock on the watch list for now. Alert investors might be able to scoop up the stock on the cheap when some of the recent excitement disappears.
Mark Holder and Stone Fox Capital Advisors have no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!