Alien Tech Invades World of Speculation

This IPO is asking investors to place an early bet on the long road to sustained profit.
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alien, adj.
1. belonging or relating to another person, place or thing: strange.
2. differing in nature or character typically to the point of incompatibility.

If you're going to write a story about

Alien Technology

, which filed for an IPO earlier this week, you have to decide whether you'll reach for the easy jokes -- you know, how the executives aren't little green men, how Fox Mulder is not on the board or how it doesn't have an office in Roswell, N.M.

I thought it would be more useful to start with Merriam-Webster's definition of alien. Even if it doesn't explain what this company does, it describes perfectly the initial public offering that it is planning: Alien Technology belongs and best relates to a market other than the public one; and investors will no doubt find it incompatible with their own desires for capital gains. They may even find it strange.

More descriptive for Alien's business model is the ticker it is seeking on the

Nasdaq

: RFID, which also stands for radio frequency ID, the technology that relies on electronic tags for wireless collection of data -- usually much more data than can be included in the current ubiquitous bar codes.

Tech companies go public for two basic reasons: To allow investors, great and small, to take part in an emerging technology or service, and to raise money to keep their business going. Ideally, those two aims should balance each other out. But that's not the case with Alien. This IPO, coming too early to ensure that Alien will emerge as an industry leader, is likely to help the company more than it helps investors.

(By the way, go to Alien's Web site and look at its logo: it looks just like an "A" drawn by the claws of a bear. That can't possibly be a good sign.)

Of course, there's little argument that the market for RFID has quite a future ahead of it. There are all kinds of ways that RFID could add efficiency to inventorying, fulfillment and real-time data tracking.

But there are also things that can go wrong -- privacy concerns, for example, were reportedly part of

Wal-Mart's

(WMT) - Get Report

decision to delay rolling out RFID technology in its supply chain.

Then there's the question of standards -- which technology will emerge as dominant not just in the U.S., but in the ever-evolving global economy. Alien is pushing hard to make its own RFID reader the standard. It's a bet that could pay off big, but it may well be that its IPO is the contemporary equivalent of getting in on the ground floor of

Sony's

(SNE) - Get Report

promising Betamax technology in the 1980s.

Regardless, Alien seems hungry for a lot of money. It raised $200 million in private investments, and it's looking for a still-undisclosed amount of money with the offering. The prospectus says the proceeds will go to expanding manufacturing and other corporate purposes like marketing, R&D and capex. Alien aims to keep doing what it's been doing on a larger scale.

Alien's strategy has relied on gaining market share for its readers by ensuring it is among the lowest-priced, if not the cheapest. That approach can often give a company a first-mover advantage in a nascent industry: Wal-Mart this month bought several thousand Alien readers, based largely on their low cost.

But in the end, customers usually opt for the strongest, most effective technology.

Buy.com

started out as a strong contender in online retailing with just this approach, but

Amazon.com

(AMZN) - Get Report

ultimately dominated because it also emphasized a smooth customer experience.

Gartner analyst Jeff Woods said in a note that the Alien IPO filing would help the RFID industry as a whole by calling Wall Street's attention to the best applications. So that's good news for Alien's competitors.

As for Alien, Woods says, its "current reader strategy -- which Gartner believes is to be the low-price vendor in the market -- has not been matched by a low-cost manufacturing capability, making the strategy unsustainable."

And so Alien is stepping into the gateway of the public markets without a sustainable strategy and a cumulative deficit of more than $200 million. Remember those dreams in which you find yourself out in public without any clothes? This IPO is the financial market's equivalent of that nightmare.

The boldness of Alien's prospectus even has the whiff of stock mania, a point that the

San Jose Mercury News

hammered home with its headline, "Radio ID Tag Start-up Files IPO Like it's 1999." Unlike some IPOs in 1999, the speculative bet on Alien's success contains a chance of paying up big. But that doesn't change the fact that it is still a speculative investment.

RFID will someday soon be a shrewd investment for public investors. And it could be that Alien is the company that eventually brings the industry to its full potential. Even so, this IPO is asking investors to bet on that outcome today, which would be like betting millions on an "American Idol" contestant based on the audition alone.

That kind of speculation may thrill some tech investors. But for many on Wall Street, the thought of acting so rashly is to their way of thinking one that is, well, alien.