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The IPO Risk-Factor in the Market

By: Nicole Urken | 05/06/14 - 01:23 PM EDT

NEW YORK (TheStreet) -Plaguing the markets--and hedge fund performance as well--year to date has been the bloodbath in the momentum names--particularly names with no earnings. Think names like Tableau (DATA) and ChannelAdvisor (ECOM) which both just reported and are moving in different directions today.

One thesis regarding the pain in these names is the simple law of supply and demand. Simply put, there is just too much supply. We are seeing initial public offerings that are popping big time in their first day but then falling significantly aftermarket as the result of lofty valuations, lockup expirations and lackluster results. Look at Twitter (TWTR) which priced at $26 back in November and rose 72% its first day of trading. The stock has fallen to aftermarket lows at $33, but with lockups expiring for investors with a low cost basis, and the company not impressing when it comes to key metrics (Monthly Active Users) the stock has been killed.

To understand a bit more of the bloodbath caused by recent IPOs, I took a look at the tech IPOs, particularly related to Cloud or Software-as-a-Service (SaaS), to see just how dismal the performance has been in the aftermarket.

Let's look at the stats for this year's IPO as of the end of last week in the tech space:

1) Castlight Health (CSLT)--which provides on-demand software that helps self-insured employers control healthcare costs--priced its IPO on March 13th at $16/share. While it rose an astounding 148% in its first day of trading, it is down 62% in the aftermarket, dropping below even its pricing.

2) Care.com (CRCM) --an online marketplace for finding and managing family care--priced its IPO on Jan 23rd at $17/share. While it rose 43% on its first day, it too has fallen considerably, down 50% in the aftermarket, and below its pricing level.

3) Coupons.com (COUP)--which distributes digital coupons for consumer packaged good companies? It priced on March 6th at $16/share. It rose 87% its first day but then came down 44% in the aftermarket.

4) Borderfree (BRDR)--which provides software that supports international e-commerce for US retailers--priced on March 20th at $15/share. It rose 25% in its first day and is down 25% in the aftermarket.

5) Amber Road (AMBR) --which provides cloud-based global trade management software--priced on March 20th at $13/share. It rose 30% in its first day of trading but then came down 21% in the aftermarket.

6) The much-loved Paylocity (PCTY) --which provides cloud-based payroll and human capital management software--priced on March 18th at $17/share. It rose 41% in its first day of trading but then came down 21% in the aftermarket.

7) A10 Networks (ATEN) --which provides software-based appliances that optimize data center performance--priced on March 20th at $15/share. It rose 8% in tis first day and then dropped 19% in the aftermarket.

8) Q2 Holdings (QTWO) --which provides an online banking SaaS platform to community banks--priced its IPO on March 19th at $13/share. It rose 17% in its first day of trading but then fell 19% in the aftermarket.

By the way, this is true for many of the healthcare names as well. Here are just two examples:

Dicerna Pharma (DRNA) --which is developing RNAi therapeutics for the treatment of rare liver disease and cancer--priced on January 19th at $15 and rose an astounding 207% in its first day. But in the aftermarket? Down 59%.

MeidWound (MDWD) --which is developing treatments for severe burns and other hard-to-heal wounds--priced on March 19th at $14 and rose 23% in its first day of trading, but was then down 40% in the aftermarket.

The bottom line: Beware of these new IPOs and the effect they continue to have in the aftermarket.

--Written by Nicole Urken in New York.

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