Banking & Finance

Why Some Key IPOs Are Hitting After-Market Lows (DMD, KMI, GM, SQNS, ZIP)

The good news for the IPO market in 2011 is that investors are willing to pay for IPOs.  They are even willing to overpay for quality IPOs.  The problem is when these get fully priced or become too pricey.  We are seeing some cracks in the IPO after-market in what were supposed to have been the more reputable companies coming public. 

Monday brought on low closes and lowest post-IPO prices for shares of Demand Media, Inc. (NYSE: DMD), General Motors Company (NYSE: GM), Kinder Morgan, Inc. (NYSE: KMI), Sequans Communications S.A. (NYSE: SQNS), and even in the recent Zipcar, Inc. (NASDAQ: ZIP).  We have outlined the trends and the underlying trading issues governing each right now.  There may even be some market-related opportunity being created here.

Demand Media, Inc. (NYSE: DMD) had a rough Monday.  The news driving it lower on Monday was a ‘reaffirmed guidance; where the company admitted that the algorithm changes did have some impact on traffic but at much less of a negative rate than what third parties had been reporting.  This late-January IPO was hotter than what we originally expected in its outsourced content and SEO-farm business model.  The original offering was 8.9 million shares, with a boost at the last-minute in shares sold by holders, and the price of $17.00 per share was above the $14.00 to $16.00 indicated price range.  After its debut, shares hit a high of $25.00 and closed at $22.65.  This still gave the company a market cap of about $1.5 billion at the time.

What was interesting about Demand Media was tha there was some controversy around the business model.  Its content is largely dependent upon freelancers.  Let’s just say that those same freelancers don’t exactly strike it rich, and in many cases are not even earning more than beer-money.  Google Inc. (NASDAQ: GOOG) has also been at part of a SEO discussion for changing its algorithm, although there is some thought that Demand Media did not get penalized like many thought.  This was actually the highest Internet valuation in years.

Demand Media shares hit a low on Monday of $16.91 and closed at $17.33 with more than a $2.00 drop on the day.  The trading volume of 1.596 million shares was also the highest since its debut. 

General Motors Company (NYSE: GM) is still suffering from its Government Motors misnomer as investors are afraid that the government will sell its stake sooner rather than later to get out of holding its troubled bailout holdings.  Losing its CFO so quickly was a huge blow, and something that investors took as a slap in the face.  Government Motors boosted its IPO price range and the deal came public at $33.00 per share and the IPO back in November raised more than $23 billion from the common and preferred shares.

GM even beat earnings and revenue expectations on its first report ever.  One issue is that some feel the auto market is going to be crimped by Japan’s woes on parts, some feel that 2011 car sales may not keep growth rates up, and some fear that the $100+/barrel oil and $4/gallon gasoline may drive buyers back to smaller cars.  Higher buying incentives act as another concern as the company may be giving away too much to get a car sale.

GM shares hit $29.90 and closed down almost 1% at $29.97 on Monday.  This was the first close under $30.00 since its IPO and the busted-IPO is now down about 10% from its IPO and down far more than that from the $39.00+ highs seen in early 2011.