Technology In 2014, Part 3: IPOs Galore (And Many Are Chinese)

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<< Read Part 1: Collaborations Rule The Day

This past year has been a solid one for initial public offerings and the total amount raised topped 2013 levels by 49%. Of the $204.8 billion raised in 2014, U.S. markets accounted for 39% with the Alibaba (BABA - Analyst Report) IPO being the biggest. Finance, technology and pharma/biotech were the major areas attracting investment.

Alibaba

Alibaba was the biggest IPO in U.S. history, raising $21.8 billion and turning its major shareholders into multi-billionaires overnight. Share prices continued to rise thereafter and stabilized only after the company reported earnings.

Alibaba is the largest online marketplace in China with both BTC (T-mall) and CTC (Taobao) platforms. It also offers a range of payment services that the majority of Chinese customers are accustomed to using. China has the world’s largest population and also one of the fastest-growing Internet populations in the world. The online retail sector in China is booming and offers good growth prospects for investors. Since Alibaba generates huge volumes and is also not a direct retailer, it has solid margins.  It generated revenue of $2.74 billion in the last-reported quarter (a 54% jump year over year), but increased investment in mobile, marketing and other new ventures led to a bottom-line miss.

The company has since refinanced $8 billion it owed banks with 10- and 20-year notes at favorable interest rates. This is the highest amount raised in recent history, signifying that confidence in this Chinese company’s prospects remains high. Share prices in fact appreciated further following the announcement.

JD.com

Unlike Alibaba, JD (JD - Snapshot Report) is primarily a Chinese online retailer with a business model similar to Amazon’s (AMZN - Analyst Report). And like Amazon, it generates very low margins, accumulating a loss in its last-reported fiscal year. But the $1.8 billion it raised through the IPO and another $1.3 billion it raised through a private placement of 138 million shares to Tencent (TCEHY) should enable it to invest in revenue growth, which has been impressive (68% in 2013 following the 96% growth in 2012). Volumes are the only way online retailers can make profit because investment in technology, merchandise/content and fulfillment results in very high costs.

Weibo

Born of Chinese online media company Sina Corp (SINA), Weibo (WB) is a micro-blogging service similar to Twitter (TWTR) but seeing increasing competition from WeChat (which is somewhat similar to Facebook’s (FB - Analyst Report) WhatsApp). Weibo generates most of its revenue through advertising and has entered into an agreement with Alibaba to closely link these ads to sales on Alibaba’s web properties. In fact, its ties with Alibaba proved crucial to raising funds from investors who viewed the company largely as a risky bet. As a result, the IPO didn’t quite meet the company’s expectations, and it was able to sell just 16.8 million of the planned 20 million to raise around $285 million in the U.S.

Mobileye

Israeli specialized software maker Mobileye N.V. (MBLY) raised $890 million in its IPO and shares soared in the initial trading session. The company’s specialty is safety-related software for automobiles, which are installed on more than 3 million cars, including those made by Tesla (TSLA) and Honda (HMC). Its technology involves a combination of cameras and software algorithms that together detect other vehicles, pedestrians, lane markers and the like to avoid collision. The company turned profitable in 2013 and intends to use some of the IPO proceeds to purchase inventory.

A number of U.S. companies also floated IPOs:

King Digital

Candy Crush maker King Digital (KING - Snapshot Report) launched its IPO in March to raise around $500 million amid growing concerns about whether it would be able to diversify its revenue sources. As a result, the initial trading session saw shares plunging more than 15%. But the social gaming company proved investors wrong with a successful sequel called Candy Crush Soda Saga (Google Play ranks it as top free app, App Annie says it was the second most downloaded game in its Nov. 25 report). While its other games have been less successful, there is a notable growth in related bookings, indicating that the company’s efforts to diversify its revenue source are proving successful. The current challenge is related to user growth, so that is the thing to watch right now.

GrubHub

The online food ordering company (GRUB) that resulted from the merger of Chicago-based Grubhub and New York-based Seamless raised around $200 million through its IPO in March this year. Shares surged following the offering, but dropped back to more reasonable levels since. The company has significant penetration at diners (more than 4 million users) and is tied with a huge network of restaurants (over 30,000) and both these numbers continue to grow. Technology companies targeting dining/restaurants have caught investor attention in recent times with the segment attracting venture capital to the tune of $2.8 billion in 2013, according to media reports. And this year saw restaurant booking service OpenTable being snapped up by online travel booking company Priceline.com (PCLN) and Amazon entering the takeout and delivery business.

But competition aside, GrubHub (Snapshot Report) is also embroiled in a legal tussle with Amaranth, which claims that the company, along with others like OpenTable, Papa John’s, Domino’s, Starbucks, Ticketmaster and Fandango are in violation of some of its patents. Amaranth has had both wins and losses in the past, so this could lead to ongoing battles in court or a licensing of its technology, both of which will be a cash drain for the company.  The patent office has confirmed that Ameranth’s patents hold good. 

GoPro

GoPro (GPRO - Snapshot Report), with a mission to help users “capture, manage and share quality content”, raised $427 million from its IPO. The wearable camera maker’s revenue nearly doubled in 2013, as a growing number of consumers started using its devices to record loads of videos. The company currently generates most of its revenue from the devices but also has a content sharing app for Xbox Live. Sharing its content on popular platforms like YouTube for a share of ad revenue seems like a good path to future growth and an option that doesn’t look too difficult for the company. GoPro shares have been on a tear and investors remain excited about its prospects to date.      

E-commerce companies in the U.S. fetch an average of 2.5 times last year’s sales, while Internet services companies trade at over 6 times, data compiled by Bloomberg show.

>> Continue to Part 4: Is China Calling The Shots?

>> Continue to Part 5: The Courtroom Drama

>> Continue to Part 6: The Final Scorecard

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