These recent high profile SEC filings, which would included Pandora’s announcement that it’s IPO is imminent further increases the chatter about a tech bubble about to burst which could also potentially signal the top of this meteoric market rise off the March 2009 bottom.  Why?  Following the market crash in 2000 and 2008, the IPO market was reduced to only those companies that were for the most part showing decent profits.  As the IPO market catches fire again, you have internet companies that are far from profitable trying to cash in as investors and traders themselves try to cash in on the “next big thing.”  There’s no doubt Groupon is a hot commodity and its growth is staggering.  We’re talking about a company that did $30 million in revenues in 2009, then hit over $700 million last year.  There is one problem though.  This is a company also burning through a staggering amount of cash to the tune of over $$400 million last year.  The red ink floodgates are still open this year as the company lost over $100 million in the first quarter.  Pandora is also still swimming in red ink after 10 years in business. 

Despite the heavy losses I think we can expect another impressive opening for Groupon and to a lesser degree Pandora.  The party can continue longer than we think and may not reach a peak until the Facebook IPO comes to fruition.  As I mentioned with the LinkedIn IPO post, it’s best to let these high flyer IPO’s (or any IPO for that matter) trade for a few weeks to see where the base develops.  LinkedIn (LNKD) is well off the opening high and continues to try to find the bottom of a base.  Should LinkedIn form a shallow base and breakout to new highs quickly, it could signal this hot IPO market is here to stay for awhile. 

When an IPO like this hits the market the knee jerk reaction is to want to jump in as soon as it begins trading for fear of missing out on the next big thing.  Taking a look at the open today with the stock more than doubling in price and surpassing $100, it definitely appears “the fear of missing out” trade is on big time!  Jumping in on that kind of trade can be a big mistake and can often lead to large losses. 

Before I get into the trading tactics let’s take a look at why LinkedIn (LNKD) is generating such buzz.  First of all, it’s the highest profile social networking site to hit the market which in all likelihood will have Facebook and Groupon wondering whether they should hit the public market sooner rather than later.  I’m sure investors and execs at both companies are seeing the dollar signs.  LinkedIn is no slouch in the social networking world, but is still dwarfed by Facebook in terms of number of users, revenue and profit. It’s dwarfed in terms of valuation too.  Based on the secondary market, Facebook has now reached a stratospheric valuation of around $70 billion while Groupon is being valued in the $15 – $20 billion range.  I believe at the current price, LinkedIn is approaching a $7 billion valuation.

LinkedIn counts just over 100 million users and doubled revenues in 2010 over 2009 to $243 million with a net income of $15.4 million. However, the company says it does not expect to be profitable on a GAAP basis for 2011 and is forecasting declining revenues and rising costs going forward (according to Reuters).  For comparison sake, Facebook has more than 600 million users and reportedly earned $1.2 billion in revenue and $355 million in net income for the first nine months of 2010.  Now you begin to see the kind of frenzy a Facebook IPO would generate if it were to go public too. 

Many are beginning to question LinkedIn’s valuation as murmurs of another tech bubble begin to grow.  Shares were priced at 17.5 times the company’s 2010 sales (that’s BEFORE today’s parabolic move).  That compares with Google’s valuation of about six times.  Is the move justified for a company that doesn’t expect GAAP profits this year or for a company that TheStreet.com says is becoming far less useful?  Common sense would say absolutely not, but then again any of us who have been involved in the markets for some time knows that common sense and reality are often two sides of the coin.  The “fear of missing out” trade can go on longer than we think.  Does that mean you should jump on the bandwagon?  In my humble opinion – NO.

That leads me to a discussion of how best to trade IPO’s, particularly an IPO that has soared out of the gates.  In a nutshell, the best strategy is to WAIT.  You want to see where this thing settles out, or more technically, where it forms its first base… a bullish triangle, a short base, a longer cup with handle or double bottom base.  The hottest IPO’s often don’t base very long, but in my experience it’s best to wait at least two weeks from the open to get a feel of where resistance and support may be.  After two weeks, I’ll revisit the LinkedIn IPO and post a chart with my analysis along with examples from the past.  Good trading out there and do not chase this IPO!

Sodastream is an Israeli company that sells home carbonation and flavoring systems for.. you guessed it!  Homemade soda and sparkling water.  While I haven’t used the product myself, the idea is brilliant and rides the wave of three important trends – an increasing awareness of the need for better nutrition, a cleaner environment and saving money (in the long run).  Three simple, but powerful trends. 

The company offers over 30 flavors to choose from including the traditional flavors such as cola, to diet options, to mixers such as tonic and even an energy drink formula.  As for nutrition, the company claims its all natural flavors contain a fraction of the calories, carbs, sugar and sodium that Pepsi and Coke do.  Environmentally, you have less packaging, cans & bottles and less pollution caused by the transportation of these products.  Americans spend BILLIONS on bottled water alone!  That stat truly disgusts me especially when you consider that some of the bottled water is more polluted than tap water!  That’s a topic for another day..

===> Click Here For Your FREE Daily Sodastream Technical Analysis Report

It all looks great in theory, but is the company selling these things?  The answer is a resounding yes… to the tune of nearly $200 million in revenue over the past year.  Keep in mind 80% of that currently comes from Europe.  The company just began ramping up its distribution here in the States this summer and now sells the product at Sears, Macy’s, Bloomingdales, Williams Sonoma, Bed Bath & Beyond, BJ’s and other retailers. It will be mighty interesting to see how well the company did last quarter when it reports this Monday.

I think there can be some comparisons made to Green Mountain Coffee Roasters (GMCR) which saw its stock skyrocket in the past few years.  The company makes the single cup coffee brewers and relies on recurring revenue from the K cup packets similar to the way Sodastream will rely on recurring revenue from the CO2 tanks and flavoring.  However, people have been brewing their own coffee for many years.  Will they begin carbonating their own sodas and sparkling waters?  That is the billion dollar question and we may find out over the next few years.  For now, the company is experiencing rapid growth and the technical action is very bullish.

When I’m looking at trading IPO’s, I always let the stock trade for at least a few weeks and look for the first consolidation period.  That could be in the form of a flat base, cup with handle base or in this case a bullish triangle.  The stock broke out of this bullish formation just above $32 and hasn’t looked back.  That provided the 1st, most ideal entry point, but it offered another entry point on a break above the high around $38.  In my opinion, it’s currently too extended for a proper entry point, but would provide a good 2nd chance opportunity on a return to $38 or lower.

Disclosure: I have no position in SODA.. unfortunately.

Camelot Info Systems (CIS): This is the highest rated IPO that I currently track with a fundamental score of 29/30.  The company provides enterprise application services and financial industry information technology (IT) services in China. It’s the largest provider of enterprise resource planning in China and names HP, Accenture and IBM as customers.

Camelot has posted significant growth every year it’s been in business and that growth continues today despite a shaky world economy.  In 2009, they experienced EPS growth of 60% and is posting record growth again this year with an estimated 113% growth for 2010.  Revenue growth has accelerated in each of the past four quarters.

Technically, the stock remains extremely bullish, but very overbought in the shorter term.  After a month long flat base formation, the stock exploded higher Aug 18th and hasn’t looked back.  It’s up nearly 50% in under two weeks and buy volume continues to come in above average.  It’s best to look for a retracement of about 50% from the breakout point above $11, so a return to the $12 – 13 area would provide an ideal entry point.

====> Click Here For Your FREE Daily Camelot Technical Analysis

Higher One Holdings (ONE): Another top rated IPO with a fundamental score of 27/30.  Higher One is a company that provides technology and payment services to the higher education industry in the US, eliminating the need for paper work and checks.  What a novel idea!  Students are allowed to pay for tuition and other fees through credit, debit or eCheck and are provided with an FDIC insured deposit account.

Higher One is another IPO on the path of big growth, reaching profitability after its first year in business in 2006 and not looking back.  In 2008, earnings really accelerated with 225% growth over the previous year, followed by 138% growth in 2009 and 65% growth expected  this year. 

Technically, the stock has really struggled and that may offer an outstanding opportunity soon.  Out of the gates, the stock ran up nearly 30% from the IPO price of $12 but really began to fall apart this month and currently trades close to $11/share.  While it will take some time to confirm a bottom and carve out a new base, the selling pressure is beginning to subside and the worst may be over.  Definitely a top rated IPO to put on the radar.

====> Click Here For Your FREE Daily Higher One Technical Analysis

 
Financial Engines (FNGN): The 3rd highest rated IPO for 2010 is Financial Engines which provides independent, technology-enabled portfolio management services, investment advice, and retirement help to participants in employer-sponsored defined contribution plans, such as 401(k) plans.  Its services are provided directly or through one of eight retirement plan providers – ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T Rowe Price or Vanguard.  JP Morgan sponsored services accounted for just under 20% of revenues last year.  Its customer list includes 25% of Fortune 500 companies and nearly half of the Fortune 20 companies. 

The company had been investing heavily in its automated solutions and didn’t turn a profit until last year, but did so in a big way posting an EPS of .20.  EPS Growth for this year is expected to come in at 45% and 28% for next year.  Clearly the investments they have made is paying off in a big way, so you’ll want to put this company near the top of your IPO watch list.

Technically, the stock began correcting just a few days after going public in March and is now in the process of carving out its first base.  What we have shaping up is a cup with handle base formation and a breakout above the 16.16 level would provide confirmation that the stock may be ready for a sustained move up.

====> Click Here For Your FREE Daily Financial Engines Technical Analysis

Green Dot (GDOT) comes in at the 4 spot with a very good fundamental rank of 26/30.  They are the leading provider of reloadable prepaid debit cards in the US and command a 40% market share.  The target customer is low/middle class who have trouble getting traditional checking and saving accounts.

Financially, it’s a company that has posted outstanding and consistent growth over the past five years.  Beginning with its first profitable year in 2006, growth really began to ramp with 375% EPS growth in 2007, 158% in 2008, 104% last year and 26% growth expected this year.  Yes, growth has been declining, but that’s expected for most companies that approach $100 million in revenue in a quarter.

Technically, the stock may be ripe for an entry.  It broke out from its first consolidation on August 9th running up a quick 10%.  Current market weakness has stalled the stock a bit and it has retraced much of that move providing a 2nd chance opportunity. 

====> Click Here For Your FREE Daily Green Dot Technical Analysis

SPS Commerce (SPSC) rounds out part I of this top IPO report in the 5th spot with a good fundamental rank of 25/30.  The company is a leading provider of on-demand software as a service for supply chain management solutions worldwide. 

This is another IPO company that recently turned to profitability.  Following losses in 2004 – 2008, it posted its first profitable year last year with an EPS of .12.  EPS is expected to more than double this year before moderating a bit in 2011.  All in all, a solid company that may be a buyout target at some point.

Technically, the stock has been correcting following an impressive open in April.  It remains mired in a long downtrend, but is beginning to show signs of stabilizing.  In my opinion, it’s too soon to consider an entry since the downtrend remains, but in another month or so, it may emerge from a downtrend and offer a real nice entry point.

====> Click Here For Your FREE Daily SPS Commerce Technical Analysis

6. Shanda Games (GAME):  This was one of the big IPO’s from last week, but didn’t perform as well as A123 Systems (AONE) out of the gates.  After opening at $13, it sold off the rest of the day and closed below $11.  Considering the run that the China gaming stocks have had, I think this IPO at this stage potentially marks a top in this sector.  That’s not to say the growth won’t continue, it’s just that they have gotten ahead of themselves a bit. 

Shanda Games is a spinoff of Shanda Interactive (SNDA).  Certainly, the success of the Changyou.com (CYOU) spinoff from Sohu.com (SOHU) had something to do with the IPO.  With the overall market risk appetite increasing and gaming stocks on fire, it makes sense.  Shanda Games contributes 95% of the revenue of Shanda Interactive and the bulk of that revenue is concentrated in just two games.  Still, that’s less of a risk than Changyou.com (CYOU), which gets most of its revenue from just one game.  Shanda Games profits nearly doubled in 2008 over 2007 and the company is on pace to come close to that again here in 2009.  Get more GAME analysis here.

7. Logmein (LOGM): Logmein provides remote access software enabling you to access your computer from anywhere.  You can even access your desktop from your iPhone.  Cool stuff!  This is a small company that really started seeing some growth towards the end of 2007 and is expected to turn its first yearly profit here in 2009.  Quarter over quarter revenue growth over the last 4 quarters has been impressive at 99%, 86%, 73% and 58% while EPS growth has come in at 108%, 150%, 200% and 289%.  Growth is expected to moderate in 2010, but this remains a company to keep on the radar.  Technically, it’s in the process of carving out its first base which may end up as a cup with handle.   Get more LOGM analysis here.

8. Rosetta Stone (RST): Many people are familiar with this software company that makes learning a foreign language much easier.  The company rolled out a high profile ad campaign during the Summer Olympics last year featuring Michael Phelps.  Smart move because it helped generate awareness of the company ahead of the IPO less than a year later.  While the stock has had a tough time gaining traction since the IPO launch on April 16th, and took a hit after lowering guidance about a month ago, this is still a company experiencing impressive growth.  After stumbling in 2006 with a loss, it has bounced back in a big way, returning to profitability in 2007 and posting record profits last year.  Here in 2009, the company is expected to grow EPS by another 40%.  It’s going to be at least several weeks before the technical damage is repaired, but this is one company that must be on the radar.   Get more RST analysis here.

9. Tri-Tech Holding (TRIT): In the first top 5 IPO report, I highlighted Duoyuan Global Water (DGW) as a top play on China water scarcity.  I think Tri-Tech Holdings is a darn good play as well.  The company develops and implements systems (both hardware and software) to assist government entities in monitoring and managing water supplies.  It’s a very small company and a fraction of the size of Duoyuan, but the growth and profit potential is just as great, if not greater in my opinion.  The stock has already doubled in price following the IPO on September 10th and I don’t think it’s done.  I’m looking for one of two things for an entry – one entry would be on a filling of the gap just below 12 and another entry would be a breakout from the first consolidation period of at least two weeks.  Get more TRIT analysis here.

5. Lihua International (LIWA): Rounding out my top 10 IPO’s of 2009 list is another Chinese company which also IPO’d in September.  Lihua is relatively off the IPO radar of most and that’s just the way I like it.  The stock has also doubled in price following the IPO and has yet to digest gains.  I think a breakout from the first consolidation period of at least two weeks offers an entry point. 

Lihua makes copper wire for a variety of industries including automotive, electronics and telecom.  A great pick and shovel play on China’s continued growth.  While growth hasn’t been as spectacular as some China companies and the company can be inconsistent at times, the overall growth is very strong.  The company posted EPS growth of 72% in 2007, 38% last year and is on pace for growth of around 25% here in 2009.  Get more LIWA analysis here.

Honorable Mention:  NIVS Intellimedia (NIV), Opentable (OPEN), Medidata Solutions (MDSO)

Disclaimer: I don’t own any of the stocks mentioned above.

1. Bridgepoint Education (BPI):  Since turning its first yearly profit in 2007, this provider of online education to over 30K students has been on a tear.  In 2008, its EPS rocketed to .51/share vs just .06/share the year before and here in 2009 it’s expected to double to a little over a buck a share.  Sales growth has been equally impressive with quarter over quarter growth in the last 4 quarters of 183%, 175%, 163% and 127%.  Technically, it’s in the process of carving out a new base after more than doubling from opening day.  Get more BPI analysis here.

2. Changyou.com (CYOU): Sohu.com (SOHU) spinoff Changyou.com probably carries more risk than most of the IPO’s coming to market in 2009 because more than 90% of its revenue comes from one online game – the martial arts game Tian Long Ba Bu.  Ah, but with risk comes considerable reward and CYOU hasn’t disappointed.  It too has more than doubled since opening day and is now in the process of carving out a new base.  Growth really ramped up in 2008 following the launch of Tian Long in May of 07, vaulting from an EPS of .10 in 2007 to 2.16 in 2008.  That growth has been tailing off quite a bit, but remains strong.  Quarter over quarter EPS growth in the past 4 quarters was 999%, 200%, 97% and 19% last quarter.  The company hopes to get the growth going again with some new games which it has in the pipeline.  Get more CYOU analysis here.

3. Solarwinds (SWI): No, this isn’t a solar company.  Indeed, it’s a strange name for a company that provides network management software, but it certainly hasn’t stunted the growth of this Austin, Texas company.  This is a company that has been around for more than 10 years and boasts more than 80K customers.  After stumbling a bit in 2006, the company got back on track and has posted an EPS of .21/share in 2007 (400% growth over 2006), .38/share last year and is expected to post an EPS of .56 this year.  Technically, this is a stock that has broken out twice this year – the first time above 15.96 on June 29th and then again on Sept 4th from a bullish triangle formation.  It’s too extended for entry at this time.  Get more SWI analysis here.

4. Duoyuan Global Water (DGW): I think investors would be wise to take a close look at Chinese companies in the water management/treatment/infrastructure areas and DGW has to be one of those.  Guo Youzhi, general secretary of the China Desalination Association, has said that only 20 percent of industrial wastewater in the country is efficiently re-utilized and 80 percent is being simply discharged.  According to a March 2009 study by China Research and Intelligence, over 70% of Chinese rivers, lakes, and seashores, and 90% of its underground water supply in urban areas are polluted.  The lack of clean drinking water and pollution in general could very well stop China’s growth in its tracks but with crisis comes opportunity.  Duoyuan EPS growth nearly doubled in 2007 and 2008 and is expected to more than triple this year before flattening out next year.  Get more DGW analysis here.

5. Recon Technology (RCON): China + IPO + commodities = hot stock and Recon Technology is no exception.  This off the radar China IPO rocketed out of the gates on July 30th, carved out a bullish triangle formation, then broke out on Sept 3rd.  It’s up about 50% following that breakout.  They provide computer software to mining and petroleum companies in China (which include behemoths CNPC and Sinopec) which aides in extraction.  One caveat is that the company is very small with just over $10 million in revenues in the past year.  So while growth remains robust, it comes from a small base.  It will be interesting to read their earnings report on September 28th.  Get more RCON analysis here.

I’ll be back later this week with part deux and another 5 top IPO’s from this year.

Guo Youzhi, general secretary of the China Desalination Association, said that only 20 percent of industrial wastewater in the country is efficiently re-utilized and 80 percent is being simply discharged.

Duoyuan Global Water (DGW) which IPO’s next week aims to alleviate some of the concern.  The  company distributes its water treatment equipment which includes filtration, water softening, water sediment separation, disinfection and reverse osmosis throughout 28 Chinese provinces.  The company is growing quickly with revenues rising 40% and net income jumping 63% over 2007 levels.. The company cites population growth and industrialization as factors that are driving demand for water treatment in the country.

The IPO is expected to price on June 23rd and begin trading the next day on the NYSE under the ticker symbol “DGW”.  The company plans to sell 5 million ADRs between $13 – 15/share with the proceeds being used to improve and build new facilities including research facilities as well as create new products.

Get the prospectus and road show video for Duoyuan Global Water (DGW) here

>>> Click Here For Your Free Duoyuan Global Water Analysis

According to the regulatory filing, Rosetta’s revenues rose 52% last year to 209.4 million over 2007.  In 2005 the company reported revenues of $48 million, jumping to $90 million in 2006 so this is a company with tremendous growth in the past few years.  In 2007 the company moved its headquarters to Arlington, VA, expanded into international markets, hired 60 employees at headquarters and recently began rolling out high profile ads featuring Michael Phelps in preparation for the IPO.

Skype founders Niklas Zennstrom and Janus Friis have been reportedly gathering private equity capital to initiate a buy back of Skype for about $1 billion so perhaps this announcement is negotiating leverage.  Either way it’s a good move for Ebay which was trading up a bit in after hours trading. 

Skype is a solid and growing business with 08 revenue of $551 million, up 44% over 2007 with 21% profit margins.  The press release states anticipated revenues of $1 billion by 2011, so certainly an IPO would fetch big bucks next year when the IPO market should return to normal levels.  The founders of Skype better raise their bid.

Said CEO John Donahoe:

“Skype is a great stand-alone business with strong fundamentals and accelerating momentum, but it’s clear that Skype has limited synergies with eBay and PayPal. We believe operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential. This will give Skype the focus and resources required to continue its growth and effectively compete in online voice and video communications. In addition, separating Skype will allow eBay to focus entirely on our two core growth engine – e-commerce and online payments – and deliver long-term value to our stockholders.”