2011 IPOs: Busts and Bargains

A volatile stock market has pushed many of this year's initial public offerings (IPOs) underwater, but some of the better-positioned companies are holding their own.

So while there have been many IPO busts, there also are some bargains out there.

Consider that 48 of the 76 companies that went public this year - 63% -- are trading at a price below their initial offer, according to data from Dealogic.

Indeed, many of the IPOs that had big pops on their first day have since fallen dramatically.

Epocrates Inc. (Nasdaq: EPOC), which rose 37% on its first day of trading, is now more than 38% below its IPO price. Demand Media Inc. (NYSE: DMD) shot up 33% in its debut in January, but is now 53% below its $17 IPO price.

Recent declines in the overall market have not only dinged IPOs from earlier this year - they've given pause to companies in the IPO pipeline.

A record 215 companies have withdrawn their IPOs so far this year. The previous record was set in 2008, when 214 companies withdrew their plans to list.

"Nobody wants to IPO into this fiasco of a market," Alec Levine, an equity derivatives strategist at Newedge Group told CNBC. "There's just massive liquidity risk. It would be great if you IPO'd the last 2 days, but awful if you IPO'd the previous 2 days-and so on."

Yet some companies, even several that had strong first days, have managed to stay in positive territory despite the rocky market conditions.

One of the most successful 2011 IPOs has been LinkedIn Corp. (NYSE: LNKD), which soared 109% on its first day. LinkedIn closed Friday at $87.65 - close to double its $45 IPO price. Servicesource International Inc. (NYSE: SREV) popped 35% on its first day and remains an impressive 54% above its IPO price.

And as a group, 2011's IPOs have outperformed the Standard & Poor's 500 Index by about 6.5%, although the stronger companies have generally done far better.

So let's take a closer look at a few of the busts - and some companies that now look like smart buys -- from this year's IPO class:

Busts

• Pandora Inc. (NYSE: P): Pandora, the popular Internet radio company may be the biggest IPO dog of the year. Pandora shares rose as high as $26 before falling to the $10-range. Many analysts have questioned Pandora's business model - its service is generally free but the company must pay royalties on every song it plays. Beyond that, Pandora faces plenty of competition from rivals like Spotify and ClearChannel's (PINK: CCMO) new iHeartRadio service.
• Demand Media Inc.: Demand Media, an Internet "content farm" that pays freelance writers about $15 per piece for articles on almost every subject, has struggled to prove it can make money. In the first half of 2011 the company grew revenue by 40%, but lost $8 million -- $2 million more than the same period in 2010. In April, Google Inc. (Nasdaq: GOOG) added to Demand Media's woes when it changed its algorithms to weed out lower-quality articles such as those produced by content farms. The stock is 53% below its IPO price.

Bargains

• Zillow Inc. (Nasdaq: Z): This real estate information site had great first day in July, rising 79% from its $20 offer price. Even with the recent market turmoil, it's still trading just under $30. Zillow reported great earnings for its second quarter, with revenue increasing 116% to $15.8 million. It made a profit of $1.58 million, compared to a loss of $2 million in the same period in 2010. The company said the disastrous housing market had encouraged real estate agents to move more of their ad business online.
• Zipcar Inc. (Nasdaq: ZIP): Zipcar is a car rental service with a twist - the cars are parked in reserved spaces throughout urban areas and college campuses. Zipcar's IPO zipped 66% on its first day of trading in May, and at $19.24 it's still above its $18 IPO price. Research firm Trefis estimates that Zipcar's membership grew 30% last quarter and stands at about half a million people, each of whom pays a $60 annual fee in addition to rental rates for actually using a vehicle. Trefis sees membership growing to more than 2 million by 2018, which it says will help propel the stock to a target price of $27.32.
• Solazyme Inc. (Nasdaq: SZYM): Solazyme is a green energy company that uses algae to produce biofuels. The stock rose 15% on its first day of trading in May but is down about 33% from its IPO price. Still, that just makes this company a bigger bargain, because algae-based biofuels figure to have a promising future in a world of rising oil prices, and Solazyme is well-positioned to take advantage. Solazyme already has deals with such government entities as the Department of Energy and the U.S. Navy. Solazyme is also talking to or working with such major companies as The Dow Chemical Company (NYSE: DOW), Unilever N.V. (NYSE ADR: UL) and Qantas Airways Ltd. (PINK: QUBSF). Although it has yet to turn a profit, Solazyme has $67 million in cash against just $220,000 of debt. Given the federal government's strong push toward green energy, this company should do well in the long term.

News and Related Story Links:

• Money Morning:
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• Money Morning:
  Buy, Sell or Hold: Now's Not the Time to Connect to LinkedIn Corp. (NYSE: LNKD)
• Money Morning:
  Tech-Hungry Investors Take the Bait With Overvalued Pandora IPO
• Money Morning:
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• The Wall Street Journal:
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• CNBC:
  Record Amount of IPOs Pulled As Volatility Spooks Companies