As you look at the most recent list of technology IPOs, you might find yourself thinking about an investment in a pharmaceutical company, preferably one that sells remedies for nausea.
The IPO pipeline has reached the toilet, judging by the technology offerings prepared over the last 24 hours. Not a single original product or service among the IT-related stocks that priced. Not one has an undisputed leading share of its market. Most have strong competitors. All have finances ranging from poor to execrable.
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Here's an admittedly shallow look at some of today's stock debutantes:
N2H2 Inc. (Nasdaq: NTWO) The company says more than 5 million people use its software, used mainly by schools to filter content on the Internet. Five million sounds great, but compared to the overall Internet audience, it's an extremely narrow market, and one whose very nature dooms it to endless controversy over obscenity and free speech on the Internet.
The company's financials are sufficiently poor that N2H2 is considering scrapping its subscription-based model entirely and replacing it with an advertising one. Newsflash for N2H@: most ad-based Web companies lose money.
Accrue Software Inc. (Nasdaq: ACRU) An e-commerce play, sort of. Accrue has just one gun in its holster: software for collecting data from and analyzing the effectiveness of websites. The main component, Accrue Insights, isn't patented, but patents or copyrights aren't very hard to get around anyway, once you know the basic idea behind the product (See Microsoft's instant messaging software, not to mention Windows itself, for details).
WebTrends, net.Genesis and others already play in this potentially huge field. No one has really established themselves as the solution of choice in this potentially huge market, so Accrue certainly has a shot.
But no one is making money on it either, certainly not Accrue. The company remains a long way from black-inked books; Accrue's losses of $6.6 million in its last fiscal year far surpassed revenues of $2.9 million. Don't be surprised if the company decides to dilute investors' holdings with a secondary offering in the not-too-distant future.
NetIQ Corp. (Nasdaq: NTIQ) Another one trick pony, relying entirely on sales of its software for managing and optimizing Windows NT applications. To the company's credit, sales growth has been strong while losses as a percentage of revenue have dropped dramatically. And the competitive field is reasonably clean.
Unfortunately, it's clean because Microsoft continually looms as a potential rival, even as NetIQ's entire lifeline depends on the Redmond, Wash. giant. Until Microsoft can remove doubts about its own problems with federal regulators, competition from Linux and others, and Windows 2000's own effectiveness as a product, NetIQ will be a tough sell to investors.
Aironet Wireless Communications Inc. (Nasdaq: AIRO) There's a lot to like on the surface for this Telxon spinoff. Wireless networking is a nifty idea, and drawing more interest in the wake of Apple's unveiling of the Airport product based on Lucent technology. Aironet has done well to boost its non-affiliate revenue, which rose 40 percent in the last fiscal year, to $28.3 million from $20.2 million.
But Telxon, a maker of wireless systems and owner of almost 40 percent of Aironet following the IPO, still provides more than a third of the company's business. Bad enough to be so reliant on your parent for support, but the parent in this case has its own problems; Telxon is coming off a fourth quarter that saw increased losses and plunging revenues as the company saw increased product returns, inventory problems and the cancellation of a large order. Telxon had to get a deadline extensions for a loan and for reporting year-end results to the U.S. Securities & Exchange Commission.
Aironet's business outside of Telxon is growing, but on a thin base: just four non-affiliate customers generate 38 percent of Aironet's revenue.
Even if everything were perfect, Aironet wouldn't be a giant any time soon. For all of the buzz about wireless networking, the market remains relatively tiny; according to the IDC study cited in Aironet's own prospectus, the entire wireless LAN market four years from now will total about $1.3 billion -- or roughly five percent of IBM's currently quarterly revenue. And the aforementioned Lucent and others are moving in to grab a piece.
Also making hitting the public today were WatchGuard Technologies Inc. (Nasdaq: WGRD), a maker of network security software, and Digex Inc. (Nasdaq: DIGX), which provides hosting for websites and applications. Neither one is particularly remarkable in any way, other than perhaps in being so unremarkable.
To investors' credit, none of these six stocks are garnering much interest. Three -- WatchGuard, N2H2 and Aironet -- have joined the ranks of the broken as their shares slide from the offering prices. The others remain mildly higher.
Some of the recent disappointing performances of new stocks might be explained by simple dilution: too many at one time, not enough interest to go around. But regardless of what the environment is like, a new stock with a compelling story will always draw attention, as Broadcast.com and eBay demonstrated last summer and early fall, when they went public in what were otherwise dry times for IPOs.
Unfortunately, most companies aren't worthy investments, which is why the vast majority of the stock market's dollars are invested in just a few companies at the top. Maybe the would-be public companies clogging the IPO pipeline will get the disappointing message and clear the way for those occasional newcomers who deserve the public's money.
Sure. And maybe Bill Gates will cash out all his Microsoft holdings and give the proceeds to me.
Broad market indices continued to shift unpredictably in the afternoon. With less than two hours left in this week's regular trading, the Nasdaq Composite Index was barely up 0.71 to 2640.72. The S&P 500 showed a loss of 8.11 to 1332.92 while the Dow Jones Industrial Average remained down 99.73 to 10691.56. 22GO>