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September 30, 2006

Analyzing ShutterFly, Inc - Post IPO While Checking out Bare Escentuals

posted by MR WAVETHEORY at 9/30/2006 12:34:00 AM
In my previous post on ShutterFly, Inc. (Nasdaq SFLY), I posed the question: "Will the ShutterFly IPO Fly?." Today, the question was answered. Shutterfly debuted at $15, went as high as $16.73 and closed at $15.55. It closed up 3.67%.

By the looks of it, the IPO sold off right after the stock open at 10:30 am and underwriters were understandably trying keep it afloat. You can see that around 2:45 pm, there was a large spike in volume. It looks like somebody was trying to bail - understandable and highly likely that it was a fast money hedge fund that had bought it hoping for a quick flip that never materialized. After all, what venture capitalists hope to be able to accomplish in 7 years (that is the amount of time that it took for ShutterFly investors to get an exit), hedge fund managers hope to do in minutes , hours, and at most months!I think a large part of the reason this deal got done was because Jim Clark sat on the board of the company. Marshall points out that optically the company had 34% net margins on $84 million in revenue. Digging through the numbers shows that the company did earn $28.4 million in 2005, but that included a $24 million benefit for tax provision. That would be a net margin of 5%. Assuming $4.4 million of normalized earnings in 2005 (backing out the $24 million), the trailing P/E is 69 - 80 times trailing. Very expensive!

The ShutterFly IPO tells venture investors and tech entrepreneurs several things:
  • Tech investor and retail investors are back. They want tech in their portfolios and that is why deals like ShutterFly can get done. A portion of the deal was placed with retail investors and you can bet that retail investors will be a renewed force to be reckoned with in future dot com IPOs.
  • Dot com is cool again because they are finally financially viable. Even though ShutterFly produced modest earnings, it was profitable. Costs have been rationalized and entrepreneurs are more appreciative of growing their businesses at a reasonable pace and a reasonable price.
  • The minimum amount of revenues required to take a dot com public has increased to well over $50 million, and the company needs to be profitable. ShutterFly had both things going for it. It had $84 million in revenues last year. Investors no longer want to invest in unprofitable, non-revenue generating companies. Standards are much higher for IPO candidates.
  • Low tech may be more sexy than high tech. ShutterFly barely budged 3% today, while another IPO, Bare Escentuals, Inc. (Nasdaq BARE) gained 22% on its debut. Bare Escentuals not only priced at $22, well above the range of $15-$17, but it tacked on another $5.15 to close the day at $27.15. Tell that to a venture capitalist! You just might find them investing in consumer skincare companies and chasing after the next Body Shop.

My prediction is that Divx and ShutterFly have whetted investors appetites for tech deals and this is just the start of a new hot IPO market. Be on the lookout for more tech IPOs to get on deck.

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