To get investors interested in an IPO, Wall Street firms normally try to price the offering at a cheap valuation. For yesterday's IPO of STARLIMS (Nasdaq: LIMS ) , the theory didn't work and the stock price was up a mere $0.03 to $13.53. It's true the Nasdaq had a bad day, but the company also seems to have limited growth potential and fierce competition.
STARLIMS develops software to manage processing, storage, and analysis for laboratories. More than 500 labs use the software; customers include Amgen (Nasdaq: AMGN ) , Chevron (NYSE: CVX ) , Exxon Mobil (NYSE: XOM ) , the U.S. Centers for Disease Control and Prevention, and the U.S. Department of Defense Cyber Crime Center.
Like the fast-growing Salesforce.com, STARLIMS was smart to make its software Web-based. This is important because its customers are global and need to centralize data. It improves the accuracy of the analysis as well as regulatory compliance.
Another good move was teaming up with EMC (NYSE: EMC ) to embed Documentum software. Not only does STARLIMS avoid spending huge amounts to create technology, it also gets a competitive edge when dealing with complex data types. The company plans to release a major software upgrade in the fourth quarter of this year.
During the past year, STARLIMS posted a 21% increase in revenues to $19.7 million and net income was $3.7 million. This is fine, but the growth opportunity seems to be limited. A report from Frost & Sullivan estimates the market size at $440 million and the annual growth rate at 12%. There are also major competitors like Thermo Fisher Scientific (Nasdaq: TMO ) and Applera Corp-Applied Biosystems Group (NYSE: ABI ) .
With an enterprise value of $88 million, STARLIMS is selling at a hefty 4.4 times revenues. That's a steep price to pay for a small company growing at a decent rate.
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He currently is ranked 2,700 out of 29,300 rated players in CAPS. The Fool's disclosure policy never dims.