There is nothing quite like an initial public offering. It is fresh meat for hungry investors. It is the chance to buy into a promising company, sometimes while it is well into its infancy. IPOs can rock. However, they can sometimes roll.
And play dead.
Friday was a perfect example as Directed Electronics
Friday was also the debutante ball for Spansion
It's easy to write off these two debuts as unique events. Directed Electronics had the misfortune of coming to market on the same day as a Sirius downgrade. The slump in auto sales probably didn't do the company any favors, either. However, sales had risen by 54% at Directed Electronics through the first three quarters of 2005. Yes, profits had dropped, but that's not the usual way to treat an IPO in a generally bullish market.
Spansion's sales have fallen by 40% this year, but individual investors have been known to forgive and forget if the potential is there. SanDisk
Beyond these two debuts
What's going on here? Have we run out of great private companies to take public? There have been a few worthy IPOs in recent months, but you also get inexplicable garbage like WorldSpace
Then again, it's not all about underaged IPOs. Because many other public companies are flush with cash, many of them are just buying smaller companies out before they complete the filing process. Skype would have been a spectacular IPO. IGN.com would have been an attractive standalone equity. It's not going to happen because both companies were gobbled up earlier this year.
Then you have companies that are likely to go public sooner rather than later but are starting to lose some of their luster. Vonage would have been the darling of the voice over Internet protocol space had it gone public earlier this year. Instead, it went for yet another private funding round, pushing its inevitable IPO further into 2006, at the risk of taking some shine off those once-sparkling fundamentals. The telcos and broadband cable providers have jumped into the market, and enhanced versions of online communication software -- like Skype -- have clouded the ultimate value of Vonage on the open market.
Putting the owe in IPO
Quality newbies help the market in many ways. The excitement brings in new investors. Having a wider breadth of great companies to buy into is healthy for sustaining bull markets. Smart public companies eventually make their competitors smarter, too.
That's why the last thing you want to see is companies going public because their creditors are getting antsy, or they're timing an IPO just as financial performance is peaking. Going public should never be an exit strategy. If you are hoping to hand over stock certificates to new owners, you'd better not be selling them a lemon. You'd better not be pulling the cruelest of "bait and switch" schemes that may irreparably damage both the company's brand and the incoming shareholder's attitude toward investing in the future.
So do keep the IPO pipeline flowing, but let's hope underwriters, institutional investors, and ultimately the little guys like you and me keep the process honest. I love freshly minted companies. As part of the Rule Breakers newsletter analytical team, which looks for great growth stocks, checking out IPOs comes with discovering great companies before the masses arrive at higher prices.
No, they can't all be Google
Longtime Fool contributor Rick Munarriz doesn't card stocks when he buys into newly public companies, but he does check out their credentials. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy . He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.