Is It Time to Power Up With This Smart Grid IPO?
In case you didn’t get the memo…
Silver Spring Networks (Proposed Ticker: SSNI), a leading smart grid technology company, is scheduled to go public next week.
According to Greentechmedia.com, “If you’re a smart grid watcher, you’ve no doubt been waiting with bated breath to hear [this] news.”
That’s because it calls Silver Spring “the most-watched potential IPO candidate in the industry.”
Well, I’m one of those smart grid watchers that Greentech Media singles out.
But my breath isn’t even the tiniest bit bated over this IPO. Here’s why…
Silver Spring Networks: A “Dumb” Play on the “Smart” Grid
Normally, I run upcoming IPOs through my proven five-step formula to determine their investment merit.
I’m not abandoning that discipline here. I’m just going to cut right to the chase and add a couple of other factors into the mix…
Silver Spring isn’t a newly minted – and therefore, super risky – startup. The company was founded in 2002.
It boasts enough revenue to prove that a market exists for its products. Total sales topped $196 million last year.
The company’s market is growing, too. With utilities warming to smart grid technologies, Pike Research expects the market for advanced metering and demand-side management services alone to grow at a 23% annual clip and reach $19.5 billion by 2015.
So far, so good.
But I’m afraid that’s where we hit the skids.
While the above factors bode positively for Silver Spring’s IPO, they don’t outweigh the numerous negatives working against the company.
Today, I want to share seven not-so-hot fundamentals to consider before you even think about investing a single penny in the deal…
~ Not-So-Hot IPO Hallmark #1: Pathetic Margins
The utilities sector is known for its razor-thin profit margins. So, unsurprisingly, a company that provides services to the utilities sector suffers from the same problem.
In 2012, Silver Spring’s gross margins hit a measly 16%. If we throw deferred revenue into the mix, the 34% gross margins still don’t impress me that much.
Either way, there isn’t much margin left over to deduct expenses and still drop meaningful profits to the bottom line.
As a general rule of thumb, we should seek technology investments that boast gross margins of over 60% if we really want to score big.
~ Not-So-Hot IPO Hallmark #2: Rampant Competition
You’ve heard us mention the importance of having a “first-mover” advantage before. That is, being the first company in a particular high-demand market.
But in addition to the pathetic margins, Silver Spring is battling against multiple rivals. The list includes Aclara, eMeter, Echelon (ELON), Elster Metering, Itron (ITRI), Landis+Gyr AG (part of Toshiba), Opower, Coulomb Technologies, Grid Net and Tendril Networks.
Talk about rampant competition. And as these companies fight for market share, they only squeeze margins even more.
~ Not-So-Hot IPO Hallmark #3: Elusive Profits
Silver Spring has been in business for over a decade. During that time, it’s received over $230 million in venture capital.
And the company still doesn’t have a single penny in profits to show for it!
Call me crazy, but that’s not exactly a hallmark of an attractive business.
If stock prices ultimately follow earnings – and they do – Silver Spring is doomed!
~ Not-So-Hot IPO Hallmark #4: Where’s the Growth?
Ultimately, IPO investing is all about having the chance to buy companies as their growth kicks into hyperdrive. That’s how we make serious profits.
I might be able to overlook the factors above if Silver Spring’s growth was rising exponentially.
But, lo and behold, Silver Spring isn’t even growing at all.
The latest year-over-year sales figures show a 17% slump. On a quarter-by-quarter basis, revenue has steadily dropped since the second quarter of 2011.
~ Not-So-Hot IPO Hallmark #5: The Trend is Not Our Friend
Over the past year, venture capital firms invested about 30% less in cleantech companies. It’s not hard to understand why, either.
VC firms make money when they flip their investments to the unsuspecting public via IPOs. Yet, the track record for cleantech IPOs is anything but spotless over the last five years or so.
SolarCity needed to slash its original offering price from $15 all the way down to $8 just to drum up enough demand.
~ Not-So-Hot IPO Hallmark #6: Failure to Launch
Silver Spring originally filed for an IPO in July 2011. Typically, a company goes public within three to four months of its initial filing.
Yet here we are, in March 2013, and the company is just now about to hit the market.
Granted, we can partially blame the unusually long delay on market conditions – especially for cleantech companies. But weak demand for its IPO overall is also a major factor.
Case in point: Silver Spring was originally looking to raise $150 million from its IPO. But that number has plunged to $63.1 million.
IPO expert, John Fitzgibbon, popularized a saying on Wall Street: “If you increase the price of an IPO, double my order. If you cut it, cancel my order.”
Although it applies to the actual price per share for an IPO, the logic holds for the size of an IPO, too. Cutting the price per share, or the total amount to be raised, indicates that underwriters are desperate to get the deal done.
More simply, the IPO isn’t that hot, after all.
~ Not-So-Hot IPO Hallmark #7: The Incredible, Disappearing Lead Underwriter
Until recently, Morgan Stanley (MS) was the lead underwriter on Silver Spring’s IPO.
But the company is noticeably absent from the latest SEC filing.
Why the sudden exit? Either the company got fired. Or bailed to save face.
Remember, Morgan was vilified for over-promoting the Facebook (FB) IPO. Another misstep could tarnish its investment banking team’s reputation permanently.
I can neither confirm nor deny that Morgan is trying to save face here. But it does raise another red flag about Silver Spring’s IPO.
Bottom line: As GigaOm’s Adam Lesser recently remarked about the difficulty cleantech companies are experiencing going public, “I think a lot has to do with the fact that cleantech companies have long roads to profitability and lots of risk.”
I couldn’t agree more. In the end, the negatives far outweigh the positives for Silver Spring’s IPO.
So unless you like gambling with your hard-earned capital, I’d let the dumb money have this smart grid IPO.
Ahead of the tape,