IPO Market Gets Loop-y

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With the poor performance of Vonage (NYSE: VG) and the plunge in the Dow and Nasdaq, it's been extremely tough for IPOs lately. Yet some have done well despite the problems. LoopNet (Nasdaq: LOOP) is a case in point.

This week, the company priced its IPO at $12 per share, raising about $42 million in net proceeds after expenses. As of this writing, the stock trades at $15.12. That price hike wasn't just hype -- there's plenty here to merit investors' excitement.

Like eBay (Nasdaq: EBAY), LoopNet is an online marketplace. However, LoopNet focuses on commercial real estate, including office, industrial, retail, and multi-family properties. Agents, owners, and landlords can list commercial properties for sale or for lease on the site. LoopNet.com has a variety of tools to streamline this process, letting visitors search by various criteria (price, location, building size, and property type) and engage in real estate transactions.

LoopNet does face competition from magazines, newspapers, and some online databases. But these organizations compile their own listings, while LoopNet's special forms allow its members to generate listings themselves. This DIY approach has been a crucial and inexpensive growth driver for LoopNet's listings.

Currently, LoopNet offers 360,000 property listings, worth about $296 billion in property value and about 2.8 billion square feet of space. The LoopNet marketplace has 1.2 million registered users, and the site generates about 590,000 unique visitors per month.

LoopNet's free Basic service lets clients create and search through listings. (LoopNet does have a quality-control filter on these submissions.) Its Premium version, with a monthly $44.95 subscription fee, offers enhanced features such as targeted marketing, access to user statistics, professional-quality reports, and MapSearch (which allows lets users search for properties using aerial and satellite maps).

LoopNet's other revenue streams include RecentSales, a database of recent commercial real estate transactions that customers can purchase, in addition to advertising and sponsorships.

In LoopNet's prospectus, the company offers an eBay-esque description of its competitive advantage: "We believe that this critical mass of commercial real estate industry participants and properties listed for sale or for lease creates a cycle that helps us to continue to grow our member base and expand our online marketplace. Commercial real estate agents, property owners, and landlords are attracted to LoopNet as a result of the large number of potential buyers and tenants, who in turn are attracted to our marketplace by the broad selection of properties listed on our marketplace."

This is the power of the so-called "network effect," in which a community fuels its own growth -- and increases its own value. For LoopNet, it's translating into strong financial performance. Last year, the company generated $30.9 million in revenues and $18.9 million in net income. In the first quarter of 2006, revenues were $10.2 million and net profits were $2.9 million, respectively a 65% and 61% increase year over year.

LoopNet is the kind of offering IPO investors like. It holds a strong competitive advantage with its low-cost member-generated listings, and offers proven profitability and room for lots of growth in the United States' $5 trillion commercial real estate market. It's no surprise that even in a terrible market, LoopNet was still able to close this deal.

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Fool contributor Tom Taulli does not own shares mentioned in this article.