As the overall health of the economy is stagnant, and small companies look to recover and grow, many investors are simply waiting for one lucky chance to get back into the game with big gains. Although there are several possibilities for striking payday again, many investors are riding the increasing wave of initial public offerings (IPOs) that we’ve seen lately.
IPOs happen when a company becomes an actual stock in which any John Q. Public can invest. That is, the smaller company goes public and anyone can buy and hold shares of it. The thing is, though, that too often the new IPO becomes a hot trend and everybody wants a piece of it. And just because it’s open for public consumption, doesn’t necessarily mean it’s good for you.
So just like any sector of the market, you’ve got to do your homework before you put your money down. If there’s no real value on the new IPO, and especially if there’s no real opportunity for growth, then you could be throwing your money away. And naturally, in this economic climate (which isn’t IPO-friendly to begin with), some new companies are naturally growing faster than others.
As a matter of fact, while 99% of companies are fending off questions about how the recession is affecting business this earnings season, one small company doesn’t have worry about that.
We all know that print advertising is dead, and the economy is putting a major strain on television advertising. But one small segment of the marketing/advertising arena is still growing at a supersonic pace…internet commercials.
Could a Hulu IPO Decimate Google’s YouTube Franchise?
Even that segment may be a bit too generalized. I’m talking about the advertising you see before and during videos on sites like Hulu.com and YouTube. These two are the behemoths of the industry, but their strategies and business models couldn’t be further apart.
YouTube still has the No. 1 spot in the online video market. With over 100 million monthly viewers, YouTube will retain its top spot for a while. Unfortunately, the company, owned by Google Inc. (NASDAQ: GOOG), can’t seem to make any money from this powerful position.
Less than 10% — some estimate as low as 3% — of its content is equipped with ads. That’s a very difficult business model considering Google has to pay for the company’s enormous bandwidth and storage expenses. According to Credit Suisse, YouTube is expected to lose nearly a half a billion dollars in 2009.
Hulu, which is second only to YouTube as the top online video supplier, is a very different animal. Most — if not all — of its content is attached to ads. You have to sit through 10-50 seconds of commercials before you ever see any Hulu content.
YouTube made its mark by allowing millions of wannabe stars upload their own amateur video free of charge. While this is what drives the majority of YouTube’s traffic, it doesn’t provide any revenue.
Hulu is still a private company. Earlier this year, landed a huge deal with Disney to start featuring its content on Hulu’s site. This deal is similar to its initial deal with NBC and its deal with News Corp (owner of Fox Broadcasting Company). The deal also gives each of the three investors a 27% share of Hulu.
That doesn’t mean, however, that you won’t be able to cash in on this up-and-coming giant. In the next few years, once the IPO market recovers, there’s a good chance we’ll see a Hulu IPO.
The company doesn’t release any financial numbers to the public, but that hasn’t stopped many media speculators from venturing a guess. The number we see most often is $ 1 billion in ad revenue per year and growing — already about five times YouTube’s revenue.
That’s simply not enough for us to go on, but it does give us hope that an IPO is coming down the pipeline. If there’s actionable advice, we’ll let you know. In the meantime, however, it does give us all the more reason to watch current market trends — and see what the fourth quarter of 2009 and the start of 2010 have in store for IPOs, and not just in the online video sector…
Why the Latest Trend in IPOs Is Great for Penny Stock Investors?
Before Q4 2009 is over, we’re all but guaranteed to witness more companies go public than we’ve seen in the last three quarters combined. That’s a prediction that isn’t just significant for investors who want to buy shares of the latest IPOs — this latest trend in the public offering world could mean serious profits for all penny stock investors. Here’s why the biggest Wall Street just turned bullish on small-caps…
In September, battery maker A123 Systems (NASDAQ: AONE) commenced public trading of its shares, raising more than $ 340 million in the largest IPO of 2009. Those who got into the stock early have been rewarded handsomely — shares are up nearly 70% right now. But AONE is only the latest in a string of initial public offerings that capped off the biggest week in IPOs since 2007.
To be fair, that hasn’t been a difficult benchmark to beat. Since the fallout from the credit crunch began, the IPO market has deteriorated to the point where only a single U.S. company went public in both the last quarter of 2008 and the first quarter of 2009. Things heated up again last quarter with 13 public offerings, but those numbers still paled in comparison to the 95 stocks that traded for the first time in the last quarter of 2007. Now, with murmurings of the recession’s end upon us, the bullish signals from an IPO resurgence shouldn’t be ignored.
Not everyone agrees with that prognosis…
“The fact that the many in the media are classifying three IPOs as a resurgence is evidence of how low our expectations have become,” National Venture Capital Association President Mark Heesen said in a statement picked up by Reuters.
“[This] not the direction we hoped to see. While the psychology of the market is trending positive, our original forecast of a true recovery not beginning until 2010 still unfortunately holds true,” he continued.
And while Heesen’s concerns about the IPO market’s recovery have been echoed throughout Wall Street this week, it’s inaccurate to say that a recovery in public offerings isn’t happening right before us. At the start of this week there had been 11 new public offerings in the third quarter of 2009. That’s a huge departure from the nearly post-mortem IPO market that we were in the midst of six months ago.
IPO bears lost more credibility on September 30 when Talecris Biotherapeutics (NASDAQ: TLCR) went public, breaking the year’s domestic IPO record for the second time in one week. The biopharma stock raised $ 950 million in its offering, the biggest IPO for the sector since 2006. The Talecris offering came after China State Construction Engineering Corp’s record-breaking $ 7.34 billion IPO on the Shanghai Stock Exchange, and a week ahead of Banco Santander’s public offering the first week of October, which at $ 7.25 billion will once again bust the year’s record for the biggest American-traded IPO.
What were the “experts” saying about a dead IPO market until 2010?
And with some exciting companies filing to go public in the coming months — including NewEgg.com and Dollar General (the latter went public on November 13 under the ticker DG) — things aren’t slowing down yet. To be clear, a strong IPO market doesn’t necessarily say much about stocks in general. In fact, the S&P 500 slumped 2% the last week of September despite all of the offering activity that was happening before us. It did — and still does — bode well for small-cap stocks, however…
There’s a big argument going on right now among the vast majority of investors: some are claiming that the market is perfectly primed for a 10-year bull rally, while others are bracing for the next market correction. But in the small-cap world, things move very differently. Every single U.S. IPO this year has been a small-cap stock, which tells me that the investment banking syndicates — which have some of the most advanced market data available — are bullish on small-caps.
Why does IPO activity suggest where the big investment banks are putting their money? Studies by Nobel Prize winning economists Franco Modigliani and Merton Miller showed that, historically, investment banking syndicates and venture capital firms will not push companies to go public in a down market. That phenomenon actually makes a lot of sense, because in a bear market, investors are willing to contribute far less money to a stock’s underwriting premium — the “commission” that an investment bank gets by selling an IPO’s shares for more than they paid.
By unleashing primarily small-cap IPOs so far this year, evidence points to growth opportunities in the small-cap space.
So, how do you make a play off the potential of penny stocks? Look for small-cap plays that remain deeply undervalued to capitalize on the buying that’s going on right now. That’s a more difficult prescription than it was six months ago before the market rally, but ignored penny stocks still remain one of the last vestiges of value right now.
It’s also important to keep in mind that sentiment is prone to change. While small-caps might be a favored market space right now, a huge drop in the rest of the market will undoubtedly take penny stocks with it. We’ll continue to watch broad moves with our Small-Cap Recovery Index for that very reason.
There’s little question that IPOs are having a fantastic quarter, one that will break records for the year once all of the numbers are crunched. And as long as the industry’s experts continue to be disappointed in the wake of unrealistic expectations, most investors will miss the growth sentiment in small-caps. That makes right now a perfect time to position your portfolio for the beginning of 2010.