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Profits of 900%, 771%, 672%, 441% and 894% in 1999
Expect epic IPO opportunities for 2000
by Siu-Yee Ng
The year 1999 has been a roller coaster ride for the IPO market. A new breed of hyper-powererd short-term trading generated unprecedented buying interest -- which in turn is responsible for a growing instability in the new issues market.
If there's only a manageable number of new issues lined up, many, if not all new IPOs will do well. Underwriters capitalize on the initial feeding frenzy -- and flood the IPO market with new issues. Inevitably, short-term traders are frightened away when a number of IPOs perform badly... leaving some IPO faltering and others delayed until a new cycle of greed has fueled the markets.
At the beginning of Q3, 1999 started, the IPO calendar was still manageable. Investors had recovered from the April-May 1999 selloff. On average, those IPOs that made their debut in the first few weeks of July on average soared 240% on their first day of trading.
Just take a look at our past weekly picks, like Internet search engine AskJeeves.com (ASKJ-NASDAQ) and Internet music software developer Liquid Audio (LQID-NASDAQ).
AskJeeves.com soared 414% on the first day and Liquid Audio opened 173% above the offer.
But the hype didn't last as underwriters brought more and more deals to the market and interest rate fears further scared away investors.
Hangover 1999
Here we entered into another cycle as we saw many deals open with little premiums. Some even fell below the offer price. By the end of the first trading day, 1-800-FLOWERS.COM, Inc (FLWS-NASDAQ) closed below the offer. U.S. Interactive, Inc. (USIT-NASDAQ) closed only 6% above the offer on the first day of trade. The returns in this cycle differed much from the earlier cycle when investors saw a 240% average gain in the new offers.
By early August, many market watchers had forecast the end of the IPO market. But when the mainstream is wracked by fear, there are more opportunities for Aftermarket buys.
In the Aftermarket, timing is of essense. And it should come to no surprise that the top Aftermarket performers during the quarter debuted in late July and early August...
Down but not out
The new issues market did recover quickly with a less crowded IPO calendar and the perception that the Fed interest rate hike will be the last for a while.
By the end of August 1999, investors were once again jumping on the IPO bandwagon -- bidding stocks to obscenely high levels. Our weekly picks have proved this to be true. Vitria Technology, Inc. (VITR-NASDAQ) closed up 202% on the first trading day and Kana Communications, Inc. (KANA-NASDAQ) closed 240% on the first day.
A total of 140 IPOs debuted during the third quarter of 1999, raising a staggering US$19.4 billion. Quite a big stretch from the third quarter of 1998, when just 53 companies went public, raising only US$7.2 billion.
What to expect in the year 2000
It's inevitable that we will enter back into the next cycle and see another correction and a great Aftermarket buying opportunity.
More than ever, investors buy into themes. With companies going public in earlier and earlier stages of development and sophistication, with little market history, or even any kind of history at all, it will become tougher to analyze the prospects of any specific company.
Most will have rapid sales growth off a small base and a large loss growth. Some of them are onboard to become the next blue chips, five or ten years down the line. But it will be more and more difficult to figure out which are the chosen ones.
Buckshot approach
To make up for lack of analytical focus, investors will be bidding up the entire sector. The most popular buzz words during the second quarter of 1999 were Business to Business (B2B), network equipment, IP telephony, and e-business software. I think it's a safe bet that the enthusiasm for these sectors will remain unflagging for much of 2000. Because the Internet provides unlimited opportunities.
Because the use of the Internet to communicate and conduct business is increasing rapidly. Companies are accelerating their movement to the Internet to capitalize on new business opportunities, reach broader consumer audiences and reduce operational costs.
IDC estimates that spending on software applications and services for e-commerce alone will grow from US$7.8 billion in 1998 to US$53.8 billion by 2002.
To compete online and to capitalize on Internet revenue opportunities (not to mention building strong shareholder value), businesses must build a distinctive presence on the web and continuously maintain and extend that presence. Accelerating time-to-web is essential to attracting customers and generating revenue opportunities.
Just as television stations create consumer loyalty with programs, web sites must do the same. Web content has to be accurate and rich to discourage web surfing. But in providing services such as frequent content updates, high-resolution graphics, audio segments, video clips, and hyperlinked text, the site has created a strong need for content management solutions. IDC estimates that the web development life-cycle management software market will grow from US$76.4 million in 1998 to US$1.6 billion in 2003.
As markets become increasingly global and enterprises become increasingly decentralized, the business environment demands a more tightly integrated network of supplier, customer and partner relationships.
Real-time exchange of information across the enterprise can enhance management and employee productivity, create manufacturing efficiencies and improve customer service. For example, real-time information exchange with suppliers and customers expedites order fulfillment, permits just-in-time inventory management, enhances sales opportunities through direct customer interaction and facilitates the implementation of e-business solutions.
Cost of doing business
Creating a real-time enterprise through technology is complex. The range of computing environments and software applications utilized across the typical business organization is vast and growing. Organizations are incorporating powerful new enterprise software while seeking to take advantage of their prior technology investments. All of an enterprise's systems and applications must be tightly integrated in order to manage, grow and extend the enterprise. So look for more E-business software and network equipment IPOs in the year 2000.
Read the rest of this update
What to Buy at What Price
Siu Yee Ng now writes a weekly IPO column on this site. Check it out for previews of upcoming IPOs, weekly picks, and a Friday afternoon wrap-up.
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