COMMENTARY--Marc Andreessen begins his second quest for IPO gold today with the offering of Loudcloud, but it's not going to be easy. Wall Street is a little more skeptical these days and Loudcloud's story has holes big enough to drive a truck through.
The only reason Loudcloud's (Nasdaq: LDCL) initial public offering will get off the ground at all today is because it has Andreessen as the founder of the company. The guy, who was the brains behind the 1995 Netscape IPO, has star power.
Give him credit. In a dicey market, Andreessen has brought on big-time underwriters--Goldman Sachs and Morgan Stanley--and is attempting to float 25 million shares priced at $6. But that's where the fun ends. This IPO looks like it's going to struggle.
Loudcloud's underwriters have been working big time to sell this puppy to investors. Loudcloud's IPO pricing was put off a day because of a snowstorm (yeah right). The company's latest filing reveals the real reason for the delay--they couldn't sell it. Loudcloud changed its terms to 25 million shares priced at $6 from 20 million shares priced between $8 and $10.
For a veteran of IPO insanity, this reaction to Loudcloud is satisfying. I remember the flames about such IPO gems as B2BStores.com and a host of others like it was yesterday.
Here's why investors aren't buying Loudcloud:
Few people understand what the company does. There are enough buzzwords to make even the most hardcore geek cringe. Officially, Loudcloud offers "a new class of Internet infrastructure services." It's so new that no one can define it. When we asked around, folks told us that Loudcloud is like an application services provider (ASP) and a services firm that builds Web sites. Hmm, sounds a lot like of other companies with market cap problems. Loudcloud has been cagey about defining itself. Who can blame it?
Two big partnerships--Accenture and Compaq (NYSE: CPQ)--may be stock induced. Loudcloud landed two key marketing partnerships last week with Accenture and Compaq, but both partners are getting shares. Why didn't these partners team with Loudcloud earlier? Are they there just to cash in?
Loudcloud is floating a large amount of shares amid weak demand. Loudcloud could be a broken IPO, an offering that falls on its first day.
It relies on dot-com customers. Nineteen percent of Loudcloud's sales derive from "Internet-based businesses." The company said it is working to diversify its customer base.
The IPO proceeds will fund Loudcloud for at least 12 months, according to regulatory filings. What happens after a year or so? With substantial losses on deck for the "foreseeable future," it's likely Loudcloud will need more cash. Loudcloud said it may raise more money privately.
The financials stink. Way back when--1997 or so--companies usually had $10 million in annualized revenue before they even thought about going public. Then the dot-com craze came and companies would go public with no revenue at all. Time to bring back the old-school rules. For the nine months ending Oct. 31, Loudcloud posted sales of $6.5 million. Net loss was $175 million. You can quibble over the exact amount of the loss because of stock compensation costs, but let's just say Loudcloud has lost a lot of dough.
Corvis: Public too young?
Speaking of companies that are too young to go public, Kintisheff Research put out an interesting research report this week about Corvis (Nasdaq: CORV), a fiber-optic equipment maker.
Corvis wasn't much different from Loudcloud. The founder had star power because he also founded Ciena (Nasdaq: CIEN). Corvis went public without a speck of revenue. The company was able to sell its IPO because it had three big customers lined up: Williams (NYSE: WCG), Broadwing (NYSE: BRW) and Qwest (NYSE: Q).
When Corvis hit the market in July it priced at $36, topped $100 a few times and now trades at $7.50.
Now the telecom equipment sector is in a rut, and Corvis is looking a little green. Kintisheff analyst Tsvetan Kintisheff said in a report that Corvis' main customers are there only because they are shareholders.
"We believe Corvis went public too soon," he said. "With limited customer orders, high operating expenses and high R&D costs, the company continues to lose money." Kintisheff reckons Corvis will turn a profit in the third quarter of 2002.
These Corvis observations are hardly cutting edge. But you still won't find many analysts saying Corvis was too young to go public.
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