What We Can Learn From IPO Successes and Failures

NEW YORK (TheStreet) -- The improving health of global markets has brought with it a spate of new stock listings during the past couple of years, which will reach a new pinnacle with the upcoming Alibaba IPO.

The first quarter saw 68 IPOs in Europe, the most since 2007, a sign the increase in IPOs throughout 2013 wasn't a one-off.

TSB, Zoopla Property Group and GoPro (GPRO) are just a few of the other companies to recently list in the U.S. and UK this year, and there's still plenty of opportunity for investors who aren't yet suffering from "IPO fatigue."

>>GoPro's Future Is Foggy Despite Picture-Perfect IPO

However, despite a broadly healthy performance across the markets, the outcome of major recent IPOs has been mixed. Can we learn from some of the bigger successes and flops and apply that to upcoming IPOs?

ING U.S. (Voya Financial)

ING (ING), a Dutch financial service provider, floated its U.S. business -- now called Voya Financial (VOYA) -- on the Nasdaq last year. The share price was initially slightly below expectations, and trading closed on its first day at $20.67, above the $19.50 price of the IPO but still below ING's intended level of $21-$24.

A disappointing result for ING has turned into a positive one for the new owners of its stock, which has risen 4.1% for the year to date and 33% for the year to $36.58, as of the Tuesday close. That rise occurred mostly in the first six months of the stock going public; by Nov. 6 (just over six months after the IPO), it had reached a price of $33.60.

It's possible the rebranding to Voya Financial, which was announced alongside the IPO and now implemented, was responsible for the initial faltering of the share price. It may also be blamed on the "unfashionable" nature of the stock. Saga Group, a more recent insurance provider to list in the UK, was also priced below expectations.

It's clear, though, that a profitable business with a secure future can swiftly overcome a blip like an unsure IPO.


Another company with a stock price that hasn't had an entirely easy path to its current high is Facebook (FB). After a disappointing listing that valued the company at $105 billion in May 2012, it has seen an impressive 64% rise in value. Its share price ended the first day of trading at $38.20 and closed Tuesday at $68, up nearly 25% for the year to date.

As with ING, this stock struggled initially although, unlike ING, Facebook did achieve the top end of its expected cost. Facebook started trading at just 2 cents above the listing price after day one and then moved significantly lower, falling to $20 by August 20. But since that low it's been mostly positive news for owners of Facebook stock, which peaked at $69.80 in March.

The main question leveled at Facebook -- whether it was able to convert high usage into ad revenue -- was a legitimate one, but one which has now been answered emphatically. Facebook earned $2.27 billion ad revenue in the first quarter of this year, 82% more than the previous year.

That's meant major gains for people who have believed in the company throughout; faith in its leadership and business model has paid off.


SeaWorld Entertainment (SEAS) went public on April 18 as private equity company Blackstone (BX) sold off part of the company it bought from Anheuser-Busch (BUD) four years previously. It sold well, pricing at $27 -- the high end of expectations -- and rising 6% to 33 by the end of day one.

Investors would have been forgiven for thinking that they were onto a winner as the stocks then rose to $38.88, up 40% on the initial cost in just a month. SeaWorld's animal rights policy has long been a cause for controversy, however, and the release of the movie Blackfish, a documentary that was critical of SeaWorld's handling of one of its killer whales, last July had a marked impact on SeaWorld's worth.

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By September, stock was back down beneath $30. Aside from a brief rally earlier on this year, it has largely remained in the $30-$32 region since and closed Tuesday at $28.10, down 2.3% for the year to date and a 7% loss when compared to the end of its first trading day.

In hindsight, the negative publicity for a company that depends so heavily on consumer goodwill was always going to be difficult to manage. But few could have predicted how large an impact Blackfish was going to have.


It's easy to forget today that Zynga (ZNGA) had a surge of hype and speculation surrounding its IPO on Dec. 16, 2011. That hype had seen price expectations balloon, with prices over $28 quoted, but the company ended up selling at a more realistic $10 per share. It then sagged slightly to $9.5 on its first day.

Back in 2011, it might have been the effect of two other overpriced tech IPOs -- LinkedIn (LNKD) and Groupon (GRPN) -- that accounted for its poor start.

And, despite Zynga's healthy profits resulting in a peak 50% higher, at $15, the stock has been on a downward trend ever since. The displacement of the social gaming platform by mobile -- and Zynga's largely unsuccessful attempts to convert its business accordingly -- has seen its shares drop to under $3, although they closed Tuesday at $3.25, down 15% for the year to date.

Like SeaWorld, the problems with Zynga are clear to us now but were harder to spot at the time. Both companies displayed clear profitability but both have faltered because the public, for entirely different reasons, turned away.

Spotting future bad publicity is always extremely difficult. Thankfully, spotting when a company does not have fundamental long-term growth potential is easier.

Of course, the biggest lesson we can learn from these IPOs -- successful or not -- is that each company that arrives at the stock market must be judged individually. Zynga's clear profit model has not yet made it a successful stock, just as Facebook's initial lack of one has not yet hindered it.

The perceived failure of a few recent IPOs should not dissuade willing traders from future ones, if they judge the company to have sufficient grounds for investment.

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates FACEBOOK INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate FACEBOOK INC (FB) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we find that the stock itself is trading at a premium valuation."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • FB's very impressive revenue growth greatly exceeded the industry average of 21.2%. Since the same quarter one year prior, revenues leaped by 71.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Although FB's debt-to-equity ratio of 0.02 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 13.15, which clearly demonstrates the ability to cover short-term cash needs.
  • Powered by its strong earnings growth of 177.77% and other important driving factors, this stock has surged by 177.85% over the past year, outperforming the rise in the S&P 500 Index during the same period. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. When compared to other companies in the Internet Software & Services industry and the overall market, FACEBOOK INC's return on equity is below that of both the industry average and the S&P 500.

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