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.
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 (UNKNOWN:COUP.DL) 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.