Last year at this time, there had been only one small-cap IPO (which is defined as a market cap of $500 million or lower). Things have been much different this year, with 11 small-cap IPOs, such as US Auto Parts Network (NASDAQ:PRTS) and AeroVironment (NASDAQ:AVAV). The latest one hit the markets last week: Salary.com (NASDAQ:SLRY). Ironically, its market cap -- about $178 million -- was lower than the compensation packages of some big-time CEOs. But this is no reason to buy the stock. In my opinion, this small-cap stock looks overvalued.
First, some background. Salary.com develops compensation software that helps reduce turnover without overpaying for employees. The system is based on a proprietary database, which includes market pricing for about 3,200 positions in companies of all sizes and in 20 industries.
Salary.com has about 1,700 enterprise customers, with marquee names like Home Depot (NYSE:HD), Honeywell (NYSE:HON), and Avon. Customers pay a subscription fee that ranges from $2,000 to $100,000 per year.
With its domain name, it should be no surprise that Salary.com has become a top online career destination. The site gets roughly 2 million unique monthly visitors and is a source of advertising, as well as a means to cross-sell its premium products.
There are definitely competitors, such as consultants, desktop software providers, and in-house applications, which often use Microsoft Access and Excel products. So what's different about Salary.com?
Other than its proprietary database, the company also delivers its software via the Internet (known as "on-demand"). It's an approach that has gained much traction, as seen with stand-out companies like Salesforce.com (NYSE:CRM), Taleo (NASDAQ:TLEO), and NetSuite. It means that Salary.com customers don't have to make investments in hardware and internal IT staffing. Moreover, the software requires little training to implement.
Like its on-demand peers, Salary.com is growing rapidly. For the most recent nine months of the current 2007 fiscal year, revenues were $16.6 million, which was up from $10.7 million during the same period in 2005. Yet the company is still bleeding red ink on the bottom line -- a $4 million loss in 2006.
Assuming a run rate of $22 million in revenues, the company is selling at almost 8 times revenues. Compared to rival compensation software company Taleo, which has a multiple of 3.4, and CRM (customer relationship management) software provider RightNow, which has a price-to-revenues multiple of 4.7, Salary.com's valuation on this basis looks pretty hefty. In other words, it probably makes sense to wait to buy this one.
Further Foolishness:
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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of 19,864 in Motley Fool CAPS.
