The names Shanda Interactive ( SNDA), eCost.com ( ECST), 51Job Inc. ( JOBS) and Cogent Systems ( COGT) didn't mean a whole lot to investors this time last year. Today, they're some of the hottest companies on Wall Street, heralding a renaissance in the recently moribund IPO market -- if not a reprise of the late 1990s. After going public early in 2004, these stocks have jumped an average of 220%, easily beating the Nasdaq's performance over the same period. Other tech-related offerings like Interchange ( INCX) and Volterra Semiconductor ( VLTR) have also ridden the wave of momentum, posting gains reminiscent of late 1999 and early 2000. "There is a certain amount of speculation that has crept in toward the end of the year," said Paul Bard, an IPO analyst at Renaissance Capital. Indeed, valuations are skyrocketing, with Cogent, Volterra and 51Job all trading at more than 15 times sales. In the most recent quarter, eCost actually lost money and the stock now sports a price-to-earnings ratio of 182 based on next year's profit estimates. If there's an IPO bubble today, though, analysts say it's nothing like the one that existed four years ago. "What you saw back then were concept companies going public, with no revenues, millions in losses and a lot of hand-clapping," said John Fitzgibbon, IPO analyst at 123Jump. "The deals that we've seen come public this year are vastly different to those that we witnessed during the days of the insanity dot-com boom." While Volterra's multiple is extremely high, the company did report a 99% increase in revenue during the third quarter while net income increased to $1.5 million from a loss of $800,000 the year before. At Shanda, a provider of online games in China, sales rose 133% in the three months ended September while net income increased 111%. Paid-search provider Interchange and Chinese human resources company 51Job have also reported stellar growth while biometrics firm Cogent has seen business improve, too.
Although eCost did lose money in the third quarter, IPO expenses were partly to blame and analysts said growth in revenue, customer base and orders was much better than expected. eCost is an online discount retailer. According to Renaissance Capital, 64% of the companies that came public in 2004 have been profitable compared to just 25% during the bubble. What's more, 2004's IPOs have been in business for 17 years on average vs. just 10 years in 1999 and 2000. Analysts also note that most of the IPO gains in 2004 came in the aftermarket, not on the first day of trade, meaning that ordinary investors have been able to make money even if they didn't receive initial share allocations. Volterra and eCost, for example, rose just 3% on the day they debuted but have since tacked on 194% and 171%, respectively. "A lot of these stocks were heavily discounted when they came to market," said Bard. "Underwriters were more disciplined in pricing and investors were pressuring companies to price them lower." On average, IPOs have risen 19% in the aftermarket this year, while the first-day pop has averaged 11%. That's way below an average first-day climb of 165% and an aftermarket return of 111% in 1999. The number of deals brought to market in 2004 and the value of those deals is also well below that of the bubble period. Still, it's clear that the IPO market has improved significantly this year. Both returns and deal volume are at their highest level in four years and 80% of IPOs are trading above their offering prices. David Menlow, president of IPO Financial Network, said this sets the stage for another good year in 2005. "There are a few economic issues that could unseat the market but there doesn't seem to be any event that would gnaw away at the foundation that's been built for the IPO market," he said.
Roughly 200 to 250 companies are expected to go public in the new year, in line with historical norms. In 2004, about 210 companies will have gone public. "We're very enthusiastic for the IPO market in 2005," said Bard. "The backlog is double where it was when we entered 2004." Of course, that doesn't mean companies like Shanda, eCost, 51Jobs and Cogent will continue to thrive in the year ahead. "Anytime a stock rises dramatically," Bard cautioned, "you always run the risk of a pullback."