The Worst IPO Peddling Isn't Social Media

NEW YORK ( TheStreet) -- The social media space isn't the only IPO game in town where prospectuses may be a lot rosier than actual company prospects.

In fact, the worst sector recently foisted on the investing public by the IPO underwriters has nothing to do with the Internet. It's rather companies in the biofuels and bioproducts arena that have been the real IPO sucker's bet.

On Friday, Amyris ( AMRS), taken public in an offering led by Goldman Sachs ( GS) and Morgan Stanley ( MS), pulled its 2012 guidance and said it would need to raise a dilutive round of private financing to shore up the balance sheet.

Amyris shares promptly tanked nearly 30%, bringing the company's all-time return since its IPO to negative 60%. The company priced at $16 in 2010 and now is trading under $7.

Solazyme ( SZYM) -- also taken public by Goldman and Morgan, is down 45% since its IPO in May of last year. The stock priced at $18 and is now trading near $11.50.

And the roll of bad biofuels IPOs continues.

KiOR ( KIOR) -- taken public by Goldman, Credit Suisse ( CS) and UBS ( UBS) -- is now down 16% since its IPO last summer, which priced at $15. Shares are now trading at $12.30.

Gevo ( GEVO) -- taken public by Goldman and UBS and now down 50% all-time -- priced its IPO at $15 in early 2011, and is now trading at $8.50.

In fact, there isn't one recent biofuels IPO that is trading above its IPO price today. And it's not as if these stocks have been beholden to a weak market dragging them lower: all of the major indexes are at least in the green over the last one year period. Even as the risk-on equities trade early this year led the S&P 500 up by more than 7% and the Nasdaq Composite up 11%, biofuels shares continue to head in the other direction.

Codexis ( CDXS), taken public by Credit Suisse at $13, now trades under $5.

Metabolix ( MBLX), taken public by Piper Jaffray at $14, now trades under $3. Metabolix is the oldest of the bunch, going public way back in 2006, and even five years after its IPO -- plenty of time to prove that those lean, profit-less early years would ultimately pay dividends -- the company's situation has only worsened.

Its major corporate backer, Archer Daniels Midland ( ADM), recently pulled out of its investment in a Metabolix major project, leading shares to their latest crash in January.

Don't think the biofuels parade will stop, though. Goldman has plans to take Ceres public, though the biofuel feedstock company recently lowered its price range and delayed an offering that had been scheduled for this week.

"Biofuels is the worst IPO class in terms of performance. They have all really tanked," said Francis Gaskins of IPODesktop.

"Social media stays up because it has a slew of users who don't understand valuation metrics and these people don't care about valuation and weren't around for the bust," Gaskins added, explaining why a Groupon ( GRPN) might take much longer to bottom out from IPO levels.

The good news is that Ceres IPO delay, and recent pricing disappointments in these IPOs, shows that investors are getting a little more wary.

"Investors aren't buying future promises anymore. These companies can still go public but the price to book value will be a lot less than the investment bankers told them," Gaskins said. "Ceres delayed because they couldn't IPO at the price Goldman told them they would -- Goldman bamboozled them," he added. Though at least, as of yet, it hasn't bamboozled the investing public with the Ceres offering.

Ceres plans to go public next week at a reduced price range of $16 to $17, down from $21 to $23 previously. Gaskins noted that strength in the Dow Jones Industrial Average last April and May allowed IPO underwriters to juice valuations, but now as the Dow is back at a similar level near 13,000, Ceres is lowering its expected IPO value.

Jeff Obsorne, analyst at Stifel, said that the primary risk in this space is that all of these technologies that work great in the test tube or at the demonstration stage don't easily scale to a commercial level on a cost-competitive basis. This was more or less the bottom line in the Amyris revelation this week and its pulling of guidance and scaling back of expansion plans.

The IPOs of these biofuels companies have been predicated on cash flow models built for years out from the IPO date -- as far out as 2014 and 2015. Any time a major milestone on the way to that cash flow model isn't met, all of the IPO assumptions are upset. Amyris's future cash flow was built on a model that assumed its business would scale across a specific number of commercial plants, and now, that assumption is no longer looking like reality.

Investors can still make a quick buck, but it's hard to justify why an investor would buy the next biofuels IPO given the sector's track record.

"The events that Amyris experienced in the last 6 months have a risk of occurring across many of the bioproducts companies that are trading today and the 10-15 that are in registration for an IPO," Osborne wrote on Friday.

Lessons learned:
  • 1. If these biofuels IPOs are to continue, be prepared to flip as quickly as possible, or wait years upon years and through multiple disappointments before expecting to see any profit or sustained market valuation gains. The flip has been the only game in town with these companies.
  • 2. Don't put much stake in cash flow models for three years out predicated on taking a lab technology to commercial scale, and for companies that have no profits at the time of their IPO. Hope is not an investment strategy, and if it's going to take years for these companies to prove they can generate cash flow, you can wait, too.
  • 3. Watch for signs of less luminous underwriters on future biofuels offerings. There are still 10 to 15 in the IPO pipeline for this year. The disappearance of the likes of Goldman and Morgan from the IPO filings may suggest the biofuels shell game is coming to an end.
  • -- Written by Eric Rosenbaum from New York.


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