James Dennin, Kapitall: As the Twitter IPO approaches, a new study shows stocks do better when they're already profitable before an IPO… In addition to a billion dollar line of credit, Twitter is also looking at one of the most favorable Initial Public Offering (IPO) arrangements in over a year. Competition to partner with the company for its imminent IPO has driven down the price of the fees bankers are hoping to collect, to just 3.25% of the total money raised. Similarly sized companies Pandora (P) and LinkedIn (LKND) were charged 7% for their IPOs last year. [Read more on Tech from Kapitall: Chinese Tech Stocks Outperforming BRIC Markets] However, as many bears on the company are quick to point out, Twitter still isn't very profitable yet. The company lost money in 2012, and with the possible exception of 2009, has lost money every year since its inception in 2006. The fact that so many banks are willing to help finance the company despite roughly six years of failing to turn a profit indicates the optimism about technology companies and the buoyancy of the IPO market, even despite concern about the budget battle in Washington. Yet as a new study in The Wall Street Journal has revealed, Twitter's case is hardly unusual. Of the 28 technology companies that have gone public so far this year, 19 failed to turn a profit the preceding year, a percentage of 68%. That's the highest percentage since before the dot.com bust – the highest of any year since 2007. Now, young technology companies attract investors for many reasons. Consider:
- Tech IPOs tend to bring high-risk and high-reward.
- Some investors are even dissuaded by signs of profitability, because that would indicate a company's maturity.
- Technology companies that have already matured may be less likely to grow.
Between 1990 and 2011, tech companies that were already profitable around the time of their IPO yielded an average 55% in their first three years of trading. Meanwhile companies that were unprofitable before their offering were up an average of just 22% over the same period.Investing ideas With that in mind, we decided to screen for technology companies that were profitable at or around the time of their initial price offering. We started with a universe of recent tech IPOs, built from lists on the New York Stock Exchange and the NASDAQ of recent filings. Then, we only screened for tech stocks that had positive profit margins. Since none of these companies are older than six months, as yet there is little data available about them. But we were still able to find four companies that are turning a profit. The next question is, will Twitter do the same? Click on the interactive chart below to see data over time. Do you see investment opportunities in recent IPOs? Use the list below as a starting point for your own analysis. 1. Evertec, Inc. ( EVTC): Provides various transaction processing services in Latin America and the Caribbean. Market cap at $1.73B, most recent closing price at $20.30. Net Profit Margin: 4.7%.
2. Gigamon Inc. ( GIMO): Designs, develops, and sells products and services that provide customers visibility and control of network traffic. Market cap at $1.08B, most recent closing price at $36.22. Net Profit Margin: 2.7%.
3. Professional Diversity Network, LLC. ( IPDN): A professional networking site and job board for Spanish, Hispanic, Latino, and bilingual professionals in the United States. Market cap at $31.59M, most recent closing price at $5.06. Net Profit Margin: 8.0%.
4. Ruckus Wireless, Inc. ( RKUS): Provides carrier-class Wi-Fi solutions to service providers and enterprises worldwide. Market cap at $1.36B, most recent closing price at $17.59.Net Profit Margin: 1.6%.
( List compiled by James Dennin, a Kapitall Writer. Quarterly sales sourced from Zacks Investment Research, IPO dates sourced from NYSE.com and NASDAQ.com. All other data sourced from Finviz.)