Shares of Demandware (Nasdaq: DWRE ) briefly hit a 52-week low yesterday before bouncing back. Let's take a look at how the company got there to find out whether cloudy skies remain on the horizon.
How it got here
Any hot IPO runs the risk of rising too high too soon, and Demandware is no different. The company is one of the few in an elite class of tech stock public debuts that soared in pre-Facebook (Nasdaq: FB ) IPO euphoria, and its stock remains one of the best performers in that group:
DWRE Total Return Price data by YCharts
This chart, which begins with Demandware's debut, doesn't tell the full picture. Proto Labs (NYSE: PRLB ) is still barely in positive territory since going public in February, and Guidewire (NYSE: GWRE ) commands a 64% premium over its January IPO day closing price. Brightcove (Nasdaq: BCOV ) is also positive since its February debut.
As you can see, Demandware's IPO arrived at the beginning of a broader downturn, and such market movements can hit high-flying tech stocks hard. All of these stocks (except Facebook, of course) remain well above their IPO price, which likely has little meaning for you, as such prices are reserved for well-connected institutional buyers.
What you need to know
None of these companies could be called "cheap" based on most current metrics. Surprisingly, it's Facebook that has some of the most outlandish numbers, with double-digit price-to-book and price-to-sales ratios. On the other hand, it is profitable, while Demandware hasn't gotten there yet:
Price to Book
Price to Sales
TTM Gross Margin
3-Year Annualized Revenue Growth
Source: Morningstar. NM = not material due to insufficient data.
To further compare, Facebook's P/E stands at 77, Guidewire's is 136, and Proto Labs sports a comparatively minuscule 33 ratio. Neither Brightcove nor Demandware are profitable at the moment. Demandware continues to grow its top line, with the most recent quarter representing a 39% increase from the same period in 2010.
The company's losses widened as a result of greater marketing and operational efforts, with 2012's first quarter operating expenses 51% higher than the same period last year. Since then, the stock has fallen 11%, but for much of the month following its report, Demandware's stock actually traded higher. Investors may soon see a rebound if the outsized cost growth looks more like a one-time boost than a necessary evil sapping long-term profitability.
Where does Demandware go from here? That will depend on its ability to attract new businesses to its e-commerce platform, and on those businesses' abilities to grow their online sales quickly. To that extent, Demandware recently rolled out a new plug-in that allows its e-commerce sites to act like desktop applications, which could be a boon for retaining repeat shoppers.
The Motley Fool's CAPS community has given Demandware a lowly one-star rating, with 58% expecting the stock to continue its 52-week trend. Our CAPS players don't seem to like Demandware's chances -- at least not at this price.
Interested in tracking this stock as it continues on its path? Add Demandware to your Watchlist now for all the news we Fools can find, delivered to your inbox as it happens. If you're looking for another hot new stock that might have more long-term potential, you've got to check out The Motley Fool's latest free report on the one tech IPO that puts Facebook to shame. To find out more, click here to get your copy of our free report today.