Playing the IPO Market: Lessons From Facebook's Disastrous IPO

Francis Gaskins  |

In this week's interview with Francis Gaskins, takes a look at the IPO landscape one year after Facebook's (FB) debut. We also discuss some of the best recent performers and upcoming offerings that investors should be paying attention to. Gaskins has been recognized by major financial media outlets such as Forbes, CNBC, Bloomberg, and many othersas one of the best resources for the IPO industry available today. Gaskins is a highly sought-after expert for his insights and opinions as an IPO analyst. Readers can see his previous weekly interviews with here.

EQ: Last week, we discussed Ambit Biosciences (AMBI), which cut its IPO price pretty drastically the day before it began trading to $8 per share. You advised before the IPO that it was probably a good idea to stay away from this one for now. Were you surprised by how poorly it actually ended up performing?

Gaskins: No, because their collaborations were ending and it looks like they will continue to hemorrhage cash indefinitely, at least in the near to medium term.  They had deep pocketed investors who wanted to save the company and who put up 43% more than the IPO in a concurrent private placement.

However, AMBI had an accumulated deficit of $245 million going into the IPO, which indicates their business plan went off track.

EQ: Meanwhile, Tableau Software (DATA) and Marketo (MKTO) both soared. Why were investors so excited about these two offerings?

Gaskins: Both companies had very strong recurring revenue growth over the past several years, continuing into the March, 2013 quarter.  There is a limited supply of tech companies with recurring, strong revenue growth, and investors jump all over those companies when they IPO.

EQ: Next week, we have a decent mix of Tech, Health Care and basic Materials IPOs. We haven’t seen many from the Materials sector yet. What are your thoughts there?

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Gaskins: Three of next week’s offerings are the result of private equity buyouts, selling at a small percentage of total revenue -- dull companies trying to access a buoyant IPO market.

One, Ply Gem Holdings (PGEM), is trying to leverage current investor interest in the homebuilding sector.  However, PGEM has an accumulated deficit of $780 million, a negative net worth of $128 million post IPO, and $856 million in debt – and has never shown a recent profit.  Nevertheless, it has a good chance of increasing from the IPO price, because investors are looking at expected sector growth rather than analyzing the company’s underlying financials.

There are two biopharma companies which need money to continue drug trials, and the last one, ChannelAdvisor (ECOM) is interesting.  ECOM is a Business-to-Business and a Business-to-Consumer software-as-a-service (SaaS) company.   For the March 2013 quarter revenue was up 25% to $15 million, and losses increased to 18% of revenue ($3 million) from 7% of revenue ($1 million).  65% of revenue comes from fixed subscription fees plus implementation fees.

The full IPO calendar is here.

EQ: This past week also marked the one-year anniversary of Facebook’s (FB) IPO, which you accurately predicted during the months prior that it would fall from $38 per share to around $18 per share. Do you feel investors and Wall Street got a wakeup call in IPO investing from such a high profile failure or have things stayed relatively the same?

Gaskins: FB’s disastrous IPO and the after-effect wiped out the IPO market until the last week in June, 2012.  Then July was quite active with a number of successful high-tech IPOs.  FB was a wakeup call not to follow an artificially created Silicon bubble created by a group that was, as it turns out, pretty much out of touch with Wall Street.

EQ: I know you generally don’t follow companies too long after they’ve gone public, but do you have any thoughts on Facebook’s stock right now and the progress (if any) the company has made since its IPO?

Gaskins: Facebook is still facing the same problems I identified pre-Facebook IPO.  For example, the transition to mobile really upset their growth applecart, and apparently caught them by surprise.

And they’ve only had two recent quarters of profitability, which is a far cry from what investors expected with Zuckerberg’s fantasy $100 billion valuation, which he turned into reality to the detriment of public investors.

Also, FB ‘s demographics are suffering because there are a number of other social networking programs attracting the interest of FB’s original overly enthusiastic crowd, namely teenagers up to middle twenties.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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