For GoPro, 2 Facts That Favor a Blockbuster IPO

But what's good for venture capitalists and private equity investors may not be good for your portfolio.

Jun 17, 2014 at 6:34PM

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Industry trends favor a GoPro IPO. Credit: GoPro.

Wearable-camera maker GoPro is seeking to raise $400 million at a $3 billion valuation in next week's expected public offering. Here's why I think the company will get at least that, and possibly much more.

Fact No. 1: The IPO market is (ouch!) hot
According to Renaissance Capital, which tracks the IPO market, there have been 124 IPOs priced in 2014, up 57% over last year at this time. All told, 181 companies have filed to go public (up 74%) with completed offerings accounting for $25.8 billion in proceeds (up 40.9%). See the pattern? The IPO market is hot again, even if the Renaissance IPO ETF (NYSEMKT:IPO) is up just 2.7% year to date versus up 5% for the S&P 500.

Fact No. 2: The right industry at the right time
What's more, GoPro is in privileged company. Three of this year's top IPO returners are tech companies, with Zendesk (NYSE:ZEN) leading the way with a near double from its $9 offering price. The company uses a cloud-based platform for helping clients better handle customer service requests. Revenue zoomed 89% last year.

Recent Ipo Returns Renaissance Capital

Among newer issues, tech names are doing best right now. Credit: IPO investment firm Renaissance Capital (www.renaissancecapital.com).

Strap on strong growth... but prepare for a bumpy ride
Interestingly, GoPro grew about as fast as Zendesk last year. The bad news? Unlike IPO winners Coupons.com (NYSE:COUP) and Arista Networks, both of which enjoyed sharply accelerating revenue growth in 2013, GoPro's sales growth is decelerating, and gross margins falling.

And not by a little. Revenue growth fell to 87% last year from 125% in 2012, and 263% the year before that. Gross margin declined to 38.2% from 43.2% and 52.3%, respectively, during the same period. Heavy investments in the GoPro product line appear to be taking a toll on profits, which fell more than 50% in the most recent quarter.

So, even if all signs point to big gains on GoPro's IPO day next week -- and maybe even the 30 to 60 days following -- there's good reason to hold off on buying the stock until after venture capitalists have cashed out, and the novelty has worn off.

How to make patience pay
IPO stocks such as GoPro are intensely alluring, and for good reason. Stories of those who bought early and held on are now the stuff of stock market legend. And yet, the smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's why I'm recommending a report on a group of high-yielding stocks from our top analysts. In it., you'll find everything you need to know about investing in the market's most reliable payers. Ready to learn more about these stocks? Just click here now for your free report.

Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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