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I know this might be hard to believe, but I don't dislike every single recent IPO. Admittedly, the valuations on many new issues have been a stretch. Facebook is anticipated to price at roughly 100 times earnings, while professional social-networking site LinkedIn trades at a very aggressive 84 times forward earnings. Finding a good value among IPOs is practically an oxymoron.
That was until the recent debut of AVG Technologies (NYSE: AVG ) . AVG, which specializes in cyber security software, had been expecting to price 8 million shares at $16 to $18 just days prior to its offering. The actual result was a first-day closing price of $13.09 -- by all accounts a terrible debut. But this is one case where investors should really give this company a second look.
AVG's primary competitors are Symantec (Nasdaq: SYMC ) and McAfee, which was purchased in 2010 by Intel (Nasdaq: INTC ) . There are some inherent disadvantages that give pessimists cause for concern with AVG. Primarily, Symantec's Norton AntiVirus software and McAfee's cyber security software have established deals with PC makers to bundle their software with new systems. AVG doesn't have any existing deals in place to get its software onto users' computers.
This is both a boon and a bane for AVG. It forces the company to rely heavily on its free antivirus software in order to draw customers to download its product. It then banks a profit if those customers choose to upgrade to a paying version of its software. According to a recent interview with CEO J.R. Smith conducted by Forbes, AVG has 106 million active users, of which 15 million are paying customers. This demonstrates both the missed opportunity and the potential for AVG if it can persuade more customers to pay or simply increase its brand exposure.
Remember I mentioned there was a boon to not having any pre-existing software deals in place? The benefit is that its cost basis per subscriber is significantly less than McAfee's or Symantec's. AVG nearly doubled its revenue in a span of two years, from $113.8 million in 2008 to $217.2 million in 2010, all while subscription revenue costs increased by a total of just 9%. Marketing costs have ballooned, but that's to be expected of a company that has to seek out its customers one-by-one.
AVG is also attractive on a valuation basis. The company has released only 8 million shares for trading thus far, but based on its full outstanding share total of 54.4 million, the company is valued at just 11.2 times its trailing earnings over the past nine months! It's reasonable to assume that if the company grew in the fourth quarter as rapidly as it has been growing, that it's trading at a single-digit P/E. That would place AVG in cheaper territory than Symantec despite its faster growth rate.
AVG has historically grown close to 40% annually and has kept its costs under control. It also, prior to its IPO, had never sought external equity financing. I'm so confident that AVG will continue to grow its brand that I plan to make a CAPScall of outperform on the company. The question now is: Would you do the same?
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