After its large IPO gains, Gigamon Inc (NYSE:GIMO) is trading with a market cap of nearly $850 million. But more importantly, this market cap represents a price to its last 12 month’s sales ratio of approximately 8.0; which is about half (to one-third) of what we’ve seen in the big data/cloud IPO markets.
With that said, you’d think there has to be a reason for its attractive valuation relative to sales: Perhaps it is due to slow growth or significant operational inefficiencies. However, Gigamon has three years of profitability (which is exceedingly rare for tech IPOs of this size), gross margins of 79% (better than competitors Cisco, Juniper, or Brocade), and is growing by 50% year-over-year (almost identical to Workday Inc (NYSE:WDAY)).
When you consider all of the above facts, you can’t help but to realize that Gigamon Inc (NYSE:GIMO) was certainly a good IPO. This is a company that is still relatively inexpensive even after large IPO gains, indicating that management was fair when the stock was being priced. To me, good IPOs such as this suggest much larger gains ahead. Thus, I would watch Gigamon closely as it’s one of the better IPOs I’ve seen in a while.
“Yes, it is possible to find value in the IPO market, but you must be willing to use common sense! If a company is trading at 30 times sales, it better have the cure for cancer or expect 200% growth for the next decade. Other than that, companies in this range should be avoided. These are overvalued companies with greedy directors and underwriters who have baked in all future gains and are being valued on speculative madness and not fundamentals. These situations rarely end pretty for the little people.”
Taking Charge With Value Investing (McGraw-Hill, 2013)
The quote above is a bit lengthy, but is exactly how I feel when referring to good, bad, and ugly IPOs. Facebook Inc (NASDAQ:FB) had everything go wrong during its IPO – and although Workday Inc (NYSE:WDAY)’s IPO was good, its lack of upside makes it ugly for retail investors.
Gigamon Inc (NYSE:GIMO) is the perfect balance of value, growth, and excitement all rolled into one stock – such opportunities are far and few between – I’d cherish this one, and the opportunity it presents.
Brian Nichols is long GIMO. The Motley Fool recommends Facebook Inc (NASDAQ:FB). The Motley Fool owns shares of Facebook.
The article The Good, Bad, & Ugly of IPOs originally appeared on Fool.com.
Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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