The initial public offering market during the first quarter of 2014 was at its busiest since 2000. The quarter ended with almost double the number of IPOs from the first quarter of 2013. Biotech proved to be the winner, with over 25 deals, many with no or very small revenues. An improving economy, easier pre-IPO regulations from the JOBS Act, and increased investor interest in funding growth companies have contributed to the IPO pick-up.
King Digital Entertainment falls: Most IPO’s performed well post-offering, but the high-profile King Digital Entertainment, owner of popular online games Candy Crush and Farm Heroes, fell almost 20% in the first few days after its offering. We discussed this anomaly with Brian Pearson, creator of the Valuation Advisors Lack of Marketability Discount Study. According to Pearson, “Investors were probably skeptical of the company’s continued scorching growth rate. From 2012 to 2013, revenues increased from $164 million to $1.88 billion, and the company’s adjusted gross cash rose from $28 million to $825 million. While, on the surface, the market value of the company (close to $7 billion) as a multiple of adjusted EBITDA of nearly 8.5 is not expensive, it may be very expensive if growth slows because the company cannot develop new games.” The revenue growth was highlighted by high user participation—users play almost 1.1 billion Candy Crush games every day. That kind of participation will be hard to replicate in future games.
Best and worst performers: In spite of the late-March bio-pharma pullback in stock prices, some of the IPO market’s best performers in the first quarter were just such companies. IPOs from Ultragenyx, GlycoMimetics, and Auspex Pharmaceuticals were all up 100% or more over their IPO price, with Relevance Therapeutics not far behind, up over 90%. Six IPOs were also down more than 10%, with the worst performance from NephroGenex, down more than 30%.
The IPO pipeline looks promising for a busy second quarter, with over 100 companies having filed to go public, including GE’s financial unit, Sabre, which operates Travelocity, and the Chinese online sales company, JD.com.
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