Shares of recent IPO Gridsum (GSUM) - Get Report  are an attractive, short-term buying opportunity ahead of the firm's quiet period expiration Oct. 18. But investors should not hold on to shares for long.

Longer-term investors should steer clear of the stock. It has negative cash flow, a sign of operational inefficiency. 

That said, once the IPO quiet period expires, the stock's strong slate of underwriters will be able to release detailed reports about the IPO.

These reports should be overwhelmingly positive, and that should push shares of Gridsum higher for three reasons: its fundamentals and leadership, smart IPO pricing and potential for success, and the strength of the underwriters themselves. During IPO quiet periods, a company (and by extension underwriters) cannot comment about its performance lest it artificially boost the stock price. 

Shares fell slightly in Friday trading. 

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Strong Fundamentals

Gridsum Holding is a data analysis software company founded in 2005 and headquartered in Beijing. Gridsum's software is used by government agencies and private enterprises. Its platform provides marketing automation, enabling companies to bid on key search words.

Gridsum has a wide array of products and services. They include a:

  • Web Dissector, an analytics tool that tracks online user interaction,
  • Mobile Dissector, a tool to analyze mobile applications,
  • SEM Dissector, an analytics tool for search engine marketing, Video Dissector, an analytics tool for analyzing video content,
  • Streaming Dissector, a tool to analyze real-time viewership of digital online videos,
  • Contribution Dissector, a tool to measure long-term user behavior, and TV Dissector, an analytics tools to measure IP, cable, satellite, and digital TV.

In addition, the company offers other analytics software for visualization, information discovery, e-government, marketing automation, TV viewing, user-generated content, social media, mass media, website analysis and legal research.

These products help Gridsum's customers identify complex relationships within their data and gain insights into their marketing strategies. That way, the firm's customers can make more informed business decisions and increase productivity.

Gridsum revenue has skyrocketed in recent years from 62.5 million renminbi in 2013 to 234.8 renminbi in 2015. It had nearly 90% year-over-year growth last year. 

At the same time, however, the company has also incurred significant net losses, including 30.7 million renminbi, 37.3 million renminbi, 48.8 million renminbi, and 29.7 million renminbi in 2013, 2014, 2015, and the six months ended June 30, respectively.

Because of these mixed financial results - including the company's negative cash-flow, a short-term investment in Gridsum based on the quiet period expiration rather than a longer term holding period would be best.

Another strength of Gridsum is the firm's notable customer loyalty and revenue retention (as noted in the firm's S-1). Revenue retention rates were 168%, 116%, and 138% in 2013, 2014, and 2015, respectively. Gridsum calculates their revenue retention rate according to the following formula: aggregate net revenues from all customers in the prior period that remain customers in the current period, divided by total net revenues from all customers in that prior period.

IPO Pricing, Performance

Gridsum went public on Sept. 22, and immediately started strongly. Shares of the IPO priced at $13, above the anticipated range of $10.50 to $12.50. Shares opened 17% above that price and finished the first day of trading at $15.75.

Gridsum shares have continued to show strength, trading as high as $18.29. Shares are currently trading slightly above the $16 mark.

Underwriters

When the Gridsum IPO quiet period expires, the firm's three powerful underwriters will likely release positive reports. Investors will likely tune in when Goldman Sachs (Asia), Citi and Stifel are finally allowed to weigh in on the recent IPO.

Buy Shares Early in the Week

To take advantage of the boost that the release of underwriter reports will likely deliver, investors should grab shares in Gridsum during the trading sessions on Monday and Tuesday. Because Gridsum's trading volume is still on the lighter side, build the position using a series of smaller trades during the more active periods of the trading session (in the first hour-and-a-half of trading and the last hour-and-a-half of trading).

The release of detailed reports about Gridsum by Goldman and Citi on Wednesday will likely draw higher trading volume and increased liquidity to the stock. Unload shares of Gridsum shortly after news of the reports is published.

This recommendation is appropriate for traders looking to profit in the short term. Investors should not hold Gridsum as a longer-term investment because of weaknesses, including the company's negative cash flow and its reliance on a significant portion of revenue from smaller customers.

The author is long shares of GSUM.