Storms could lie ahead for Cloud IPOs
Cloud-computing companies have been doing well in the IPO market, but investors need to ignore the hype and do their homework.
Every cloud has its silver lining. That has certainly been the case with cloud-computing companies going public. New cloud stocks have been rising high within the IPO market.
The latest to billow was ServiceNow (NOW), which priced its shares at $18 on June 28. The initial range had been $15-$17 a share, and the stock is already trading at more than $26 a share.
It's this kind of performance that has pushed many companies to promote themselves as cloud-based service companies even if they aren't. They hope that investors won't do their homework and not look beyond the claim of cloud, resulting in a successful offering.
It's an understandable strategy. Other successful cloud stocks include Jive Software (JIVE), which is up 73% from its December 2011 IPO; Cornerstone OnDemand (CSOD), which has risen 79% from its March 2011 offering; and Servicesource (SREV), which has gained 35% from its March 2011 IPO.
The key here is not assuming that if a company has the word "cloud" in its description that the returns on its shares will be lofty.
Revenue increased from $44 million in fiscal 2010 to $56 million in fiscal 2011. However, the company has posted a string of money-losing quarters. In its filing the company wrote, "Throughout most of our history, we have experienced net losses and negative cash flows from operations."
It's also drowning in debt. There is a lot of buzz about this company, but if it can't control its expenses, this offering won't be enough to pay off much debt.
Reval Holdings filed in March to raise $75 million. It is a provider of treasury and risk-management solutions through cloud-based software.
Reval also points to rapidly growing revenue. Its top line jumped from $21 million in 2009 to $45 million in 2011.
But like E2open, Reval has a problem making money. It lost $19 million last year and blames its losses on investing in expanding its client base and technology. The problem is that Reval has lost millions over the last three years, so when will it ever make a profit?
Palo Alto Networks is a security provider that allows enterprises, service providers and government entities to secure their networks. Its key feature is that it can go into a company's infrastructure and allow the customer to vary uses of applications within the company. For example, some departments may need to use Skype, while others would be blocked.
The company is hoping to raise $175 million according to its filing in April. It is a Morgan Stanley (MS) deal, and the road show is expected to begin the week of July 9.
The company will list its shares on the New York Stock Exchange. Palo Alto hits the road with revenue doubling to $118.6 million and losses coming down from $21.1 million to $12.5 million for the fiscal year ending July 31. At least the losses are narrowing and not increasing like some of its peers.
Blackstratus also filed in April and is a much smaller deal, coming in at $20 million. It describes itself as a "leading" provider of cloud-based security information and event-management software solutions.
I'm not so sure about the company's use of "leading," because revenue slipped 22% last year, and the decline was attributed to a major customer making its purchase in 2010 as opposed to 2011.
This is also one of the first companies to take advantage of the Jumpstart Our Business Startups Act (a.k.a JOBS Act) by releasing only two years of financial statements. To make matters worse, the auditor, EisnerAmper, expressed doubts about the company's ability to continue as a going concern. Looks like a dark cloud.
The most recent entrant to the IPO scene is Qualys, which filed in June to raise $100 million. It's a provider of cloud security and compliance solutions that helps customers identify security risks to their IT infrastructures and maintain compliance with internal policies and external regulations. Its revenue increased 16.5% from 2010 to 2011, but so far in 2012 the company has posted a net loss.
Does this seem like a broken record: Cloud companies that aren't making money and want investors to focus on the revenue side of the balance sheet? At least ServiceNow made money in 2011, even though it has started this year with a loss.
Investors may want to skip these upcoming cloud IPOs and focus on companies with proven track records.
Kayak is also expected to start its roadshow the week of July 9. It's an online company that makes money by sending referrals to travel vendors. However, it brings several years of profitability along with increasing revenue. Go figure, an offering from a company that makes, not loses money.
Investors, get your heads out of the clouds.
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