RealD IPO: A Bet on 3D's Future

By IPOfinancial.com

Was Avatar the start of a new 3D viewing experience, or part of a trend that may fizzle before there is time to release a sequel? As a global licensor of stereoscopic 3D technologies, the success of RealD -- RLD's upcoming IPO hinges on the "right" answer to that question -- that 3D is the wave of the future.

Similar to Tesla ( TSLA), investors will once again be asked to look into their crystal balls to determine future consumer trends and evaluate a company on its growth potential rather than its current fundamental performance.

Timing is everything. By scheduling RLD's IPO the week after Universal releases its first RealD film, Despicable Me, last Friday, JP Morgan ( JPM) may be assuming the hype will boost the opening premium when it prices 10.75 million shares between $13 and $15.

RLD should be able to support a mid-range pricing, followed by an opening premium, but with continuing bottom-line losses, the stock price may level off in the aftermarket.

Additionally, insiders will be selling 4.75 million shares, or 44% of the total offering, as there is a minimal amount of private equity involvement. Investors will be expected to look past these "flaws" and focus on the big picture as 3D attempts to take over the movie-going experience and transition into consumer's living rooms.
    RealD -- RLD
  • Lead Underwriter -- JP Morgan
  • 10.75 million shares
  • Current Price Range $13 to $15
  • Deal size to the mid-range -- $150.5 million
  • Market cap to the mid-range -- $667.3 million
  • Sector -- Radio & TV Communications Equipment

The limited 3D release of Disney's ( DIS) 2005 Chicken Little earned RLD the distinction as the first to enter the market. Continued branding efforts have led to a close association between RLD's brand and the overall 3D experience, nearly making them one and the same.

Management has stressed the importance of achieving this level of branding, viewing its product as "second to none." By building relationships with retailers and consumer product manufactures, RLD hopes to integrate its 3D technology in upcoming merchandise such as LCD televisions, game consoles and laptops, all of which are expected to hit the market in upcoming months.

Unfortunately, there is still the looming question of whether this technology will generate widespread acceptance or simply develop a cult following among techies. Regardless of the immediate outcome, RLD remains an innovator in the industry and is expected to adapt its services to propel 3D beyond the "gimmick" phase.

With RealD-enabled screens "representing 75% of total domestic 3D box office in 2009," RLD is the obvious leader in this market. Its name is prominently advertised throughout the 17 of the world's top 18 "motion picture exhibitors," which license its technology, typically on five-year exclusive agreements.

Its RealD Cinema Systems can be installed in a matter of hours, instantly upgraded existing digital cinema projectors at a lower cost than competition 3D systems. Additionally, management claims its circular polarized passive RealD eyewear provides a more comfortable 3D experience, allowing viewers to move their heads with reduced image distortion and fewer headaches.

Just over the past quarter there was a 5.2% increase in locations worldwide and a 12.1% increase in RealD-enabled screens, now totaling 5,966. On a small scale, this is an impressive growth rate, providing a strong argument for RLD's potential.

However, to put things in perspective, there are approximately 149,000 total theater screens worldwide, leaving a lot of room on the table for competitors to penetrate the markets.

Since RLD's story may seem almost too good to be true, it probably is. Although RLD has established a strong market share, it must compete with the IMAX experience, with screens and theaters specifically designed for 3D movies, and also the financial resources of Dolby, which creates direct competition with the newest 3D technology known as Dolby 3D Digital Cinema.

Keep in mind the public has the final say, and while 3D movies are seeing a surge in production, with 23 expected to be released in 2010, nearly doubling the 13 released in 2009, there is no guarantee they will generate the box offices numbers that are necessary to promote further investments from Hollywood studios.

Consumers have tolerated the need for 3D glasses thus far, but it is a drawback for the technology and may hinder the overall adoption of the 3D format. RLD realizes many trends that were once novel can quickly become a nuisance and are researching a 3D technology, which would not require glasses, but there has not been anything officially developed.

Regardless of the direction 3D technology will take in the long-term, RLD will benefit from the short-term shift in the movie industry. However, investors may not see an immediate impact to results, as RLD is expected to report bottom-line losses for several quarters as it struggles with the upfront costs associated with distributing and recycling its proprietary eyewear. Gross profit margins came in at 6.2% for fiscal 2010, but eventually economies of scale will allow revenue growth to outpace expenses.

It will work in RLD's favor that it maintains low debt levels and can reinvest two-thirds of the $75 million expected from the IPO proceeds into future expansion opportunities.

RLD may not appeal to investors that are focused purely on the fundamental strength of an IPO. Instead RLD offers strong growth potential for those willing to take a risk on a technology play.

A quick walk through your local Best Buy ( BBY) or a drive past the movie theater will offer a good gauge for RLD's future potential. It has positioned itself to be the "go-to" 3D technology developer, but consumers will have the final say as to how the 3D craze will develop.

A full report on this stock is available from IPOfinancial.com

IPOfinancial.com in Millburn, N.J., is the oldest equity new issues research firm on the Street, with 20 years of experience. IPOfinacial projects the opening premiums of IPOs and secondaries before they price. Its research packages are available to individual investors and institutions alike.

More from Opinion

How to Avoid Investing in a John Schnatter: Dumbest Thing on Wall Street

How to Avoid Investing in a John Schnatter: Dumbest Thing on Wall Street

Microsoft Pops on Strong Earnings and Guidance: 8 Key Takeaways

Microsoft Pops on Strong Earnings and Guidance: 8 Key Takeaways

Microsoft's Earnings Provide Fresh Proof That the LinkedIn Deal Is Paying Off

Microsoft's Earnings Provide Fresh Proof That the LinkedIn Deal Is Paying Off

Bitcoin Prices Are Back Up, but Traditional Investors Remain Skeptical

Bitcoin Prices Are Back Up, but Traditional Investors Remain Skeptical

EBay's Soft Guidance Doesn't Reflect Well on its Attempts to Fight Off Amazon

EBay's Soft Guidance Doesn't Reflect Well on its Attempts to Fight Off Amazon