March 09, 2005
With Internet IPOs ODMO and SHOP underwater, how cheap are they now?
Two recent Internet IPOs - Odimo (ticker: ODMO) and Shopping.com (ticker: SHOP) - are both trading below their IPO prices. With stronger balance sheets from the cash raised in the IPOs, where does that leave their valuations?
- Odimo is an online retailer of luxury goods including (grey market) watches. It priced its IPO on February 15th at $9 per share. Last night the stock closed at $7.45, 17% below its IPO price.
- Shopping.com, the largest comparison shopping engine on the Web, priced its IPO on October 25th at $18 per share. Last night the stock closed at $15.84, 12% below its IPO price.
What are the stocks' valuations now?
Cash is critical, so we need to look at enterprise values not market caps:
Odimo: valuation unclear
- Odimo's balance sheet isn't entirely clear. Here's an attempt: 3.125 million shares were sold in the IPO, but 625,000 of them were from existing shareholders. The underwriter, CIBC World Markets, was granted an option to cover over-allotments of 562,500 shares. So how many shares did the company itself sell? Well, the stock traded down almost immediately after the IPO which also priced at the bottom of the expected range. So the underwriters' option probably wasn't exercised. That means that Odimo itself sold only 2.5 million shares, raising $22.5 million. Underwriters' fees - let's say 7% - would reduce that to about $21 million.
- According to Odimo's S-1, prior to its IPO the company had $65,000 of cash, $525,000 of restricted cash, and accounts receivable of $201,000. Accounts payable and a bank credit line totaled $20.2 million, so net debt at the timeof the IPO was about $19.4 million. Odimo stated that it planned to repay $9.4 million of debt from its IPO proceeds.
- Deduct the $19.4 million of net debt from the IPO proceeds of $21 million, and Odimo is left with net cash after the IPO of about $1.6 million. With a current market cap of about $53 million, that gives Odimo an enterprise value of about $51.4 million, or about $7.17 per share.
- How to value Odimo? Tough one: there are no analyst estimates currently available for 2005 EPS, and while the company grew revenue in 2004 but still wasn't profitable.
Shopping.com: 8.2x estimated 2006 EBITDA
- Shopping.com is far easier: it published its full balance sheet and gave EBITDA guidance for 2005 when it reported Q4 earnings on February 3rd.
- Current assets were $155 million. Current liabilities were $19 million. There was no long term debt. So net cash is about $136 million.
- Deduct that net cash from Shopping.com's current market cap of $468 million (with the stock trading at $15.84), and Shopping.com's enterprise value is $332 million.
- Shopping.com gave EBITDA guidance for $25 million (mid-point of range) for 2005. The stock is thus trading at an enterprise value to (guided) EBITDA multiple of 13 times 2005 guidance.
- The company also stated that 2005 EBITDA guidance was depressed by the projected cost of its European expansion, which would reduce EBITDA margins from 27.3% in 4Q '04 to 19.5% for 2005. For that reason, it seems reasonable to expect a margin rebound in 2006.
- Back of the envelope 2006 EBITDA calculation: 2005 revenue of perhaps $130 million grows 25% to $162 million in 2006. EBITDA margin rebounds to 25%, giving 2006 EBITDA of about $41 million.
- With its current enterprise value of $332 million and back-of-the-envelope 2006 EBITDA of $41 million, SHOP would be trading at an EV to '06 EBITDA multiple of 8.2 times. That's significantly lower than its Q4 revenue growth rate of 33%, and the 2005-2006 growth rate of 25% that I've used.
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