Endless Summer for Tech IPOs

The recent tech rally is contributing to an upswing in initial public offerings. We saw a surge of IPOs over the summer, and the momentum is continuing into the fall, as seen in last week's public debut of athenahealth (NASDAQ:ATHN), whose shares surged nearly 100% over their initial price.

To get some perspective on things, I pulled some interesting data from Renaissance Capital's IPOhome.com, which has tracked IPOs for more than 20 years.

For the summer, there were 18 tech IPOs, a 50% increase from the same period a year ago. In all, these newly public companies raised $3.1 billion -- up 86% over the past year. Small wonder, when you consider that investors have been shelling out big bucks for the offerings. On average, the first-day pop was about 31% compared with last year's 11%.

Roughly 50% of the IPOs were in the storage/networking sector. And with the continuing surge in Internet traffic and corporate data, the demand for such infrastructure technologies should continue apace.

In the next few months, the following storage/networking offerings are expected to hit the market:

The No. 2 tech category of the summer was software, with four public offerings. But investors are clearly focused on Web-based approaches to software, such as what DemandTec (NASDAQ:DMAN) and athenahealth offer. These companies represent a disruptive force because their pricing tends to be lower than that of traditional software vendors, and the installation and maintenance are generally easier.

Seven Web-based companies are on the IPO docket for autumn. Of these, as I pointed out in a recent Fool article, I like the prospects of NetSuite, which is targeting the large market for enterprise resource planning (ERP) solutions.

However, Web-based operators are not immune from the vagaries of the marketplace. Just look at employee-screener HireRight, whose shares have fallen approximately 30%. The company has come under pressure from the weakening economy.

The winner
So what was the summer's hottest IPO? The winner is VMWare (NYSE:VMW), which is up 189% since its debut. I admit that I was bearish on the stock because of its valuation. But the IPO market can support outsized returns, and VMWare is proof.

Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) had invested in the company before its public offering. No doubt, they understood that VMWare is at the forefront of a megatrend in technology called virtualization -- a way of enhancing the performance and usability of data centers.

And the financials are breathtaking. In VMWare's fiscal second quarter, revenues surged approximately 90% to $296.8 million, and license revenue rose 80% to $204 million. Most software companies would die for metrics like that.

The loser
The ignominious distinction of worst summer IPO for the summer has to go to Limelight Networks (NASDAQ:LLNW). Even though the company provides a compelling technology to help companies deliver Internet content much more quickly, its shares have fallen by about 40%.

The key problem: Limelight's main rival, Akamai Technologies (NASDAQ:AKAM), which engaged in some old-fashioned price cutting. As a result, Limelight disappointed Wall Street on its fiscal Q2 results.

The Internet
There were only two public offerings of consumer Internet companies over the summer: MercadoLibre, up 111%, and Orbitz Worldwide, down 14%. But with the continued growth in online advertising, I think we'll see more filings in the sector.

Some upcoming consumer Internet IPOs include those for CreditCards.com, Internet Brands, and Classmates.

The big picture
So looking back on things, we can see some takeaways for investors. First of all, the successful IPOs are focused on multibillion-dollar market opportunities and enjoy dominant positions. What's more, these companies are showing significant revenue momentum, such as a 50% rise or more.

But of course, there are risks, too -- even among the companies that appear to be rock-solid. As always, when investing in IPOs, you need to be cautious and prepared for stomach-churning volatility.