I’m nominating an up-and-coming technology company, which shouldn’t come as a total surprise.
As I’ve noted before, tech companies are dominating the IPO market this year. So far, 22 out of the 68 IPOs in 2012 have been technology companies. That works out to about 33% of the deal flow – well above the 10-year average of 23.4%, based on Renaissance Capital data.
Like so few IPOs, though, Exponential Interactive (Proposed Ticker: EXPN) possesses all the hallmarks of a hot IPO, which is precisely why we’re adding it to our “Hot IPO Watch List.”
Advertising Enters the Digital Age
Per the company’s S-1 filing, Exponential provides “an end-to-end solution that enables brand advertisers to learn about their optimal consumer audience, reach and engage that audience with emotive advertising and analyze and refine their marketing campaigns.”
Translation: It’s a digital advertising company. And its proprietary “eX Advertising Intelligence Platform” helps blue-chip companies reach customers digitally.
A need clearly exists for such services. Case in point: Of the $449 billion spent globally each year on advertising, only $64 billion (or roughly 15%) comes from digital advertising, according to ZenithOptimedia. And yet, consumers are abandoning traditional print in favor of digital media at an accelerating rate.
And since advertising always follows eyeballs, it’s only a matter of time before brand advertisers ramp up their digital media advertising.
Exponential is the obvious choice, as it’s already partnered with 1,900 advertisers, including 88 of Advertising Age’s 100 Largest Global Marketers.
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As far as its investment merits go, Exponential stacks up favorably against all of our IPO criteria:
~ Age: The older and more established a company is when it goes public, the better the stock tends to perform. And founded in 1998, Exponential has been around long enough to demonstrate viability. That’s not something you could say about most IPOs during the dot-com collapse. The average IPO back then hit the public market at just four to five years of age.
~ Revenue: In another sign of its maturity, Exponential boasts almost $170 million in sales. Research from University of Florida professor, Jay Ritter, shows that companies with more than $50 million in sales before they go public perform best, rising by an average of 38.8% over three years. That compares to only a 5% rise for companies with less than $50 million in sales at the time of their IPO.
~ Verifiable Growth Opportunity: An IPO is an investment in the future growth of a company. And Exponential boasts ample growth opportunities, penetrating less than 1% of a market worth $64 billion. What’s more, the company’s established strong sales momentum. Since 2009, revenue increased an average of 35.2%.
~ Profitability: As I’ve said countless times before, share prices ultimately follow earnings. And the performance of IPOs during the dot-com era proves my point perfectly. Roughly 70% to 80% of companies that went public during that period were unprofitable. And go figure… roughly the same amount of companies crashed and burned in the aftermarket.
On the other hand, Exponential has been profitable on an annual basis since 2002. Increasingly so, I might add. Since 2009, net income increased an average of 51.2%.
Only If the Price is Right
The last criterion to consider, of course, is valuation. But we’ll have to wait until Exponential finalizes its IPO plans before we can determine whether the price is right.
For now, add the company to your “Hot IPO Watch List” for 2012. And stay tuned for future updates.
Ahead of the tape,