Wall Street Beat: IPOs stress IT health, not bubble

Though business demand for IT products remains moderate, initial public offerings (IPOs) point to a healthy sector that is instilling confidence among investors.

But IT is not back to the days of the bubble. Gone are the days when companies issue IPOs on promises alone.

"You need real products and services, tangible results," said Eric Gebaide, managing director of Innovation Advisors, an investment banking firm. Companies generally need about US$50 million in revenue before going public, he said.

The IPO market is better now than it has been for years, and IT has nabbed a good share of investor funds, according to an IPO survey issued this week by Thomson Financial and the National Venture Capital Association. In May, there were 11 IPOs in the U.S., more than for any month since October 2004. For the first five months of the year, the number of IPOs, and their dollar amount, hit their highest level since 2000, right before the dot-com bubble burst.

Of the 33 IPOs so far this year, and the $5.1 billion they raised, IT's share lagged behind medical, health and life sciences. But the biggest IPO was for a wireless communications company, MetroPCS Communications Inc., with an offering that raised an initial $1.15 billion.

Also, average performance for IPO companies so far this year is strongest in IT, where companies have realized a 13.9 percent increase from offer price to close, according to IPO survey. Medical/Health/Life sciences IPO companies realized a 2.2 percent increase and non-high tech sectors registered a 6.6 percent increase.

Valuations are also up in general, to $156.7 million per IPO for the year so far, an all-time record.

"Revenue growth and profitability are driving valuations up," said Gebaide. For IT, investors have seen eight to 10 quarters of solid revenue, he noted. Companies are more confident about financial forecasts, which also boosts confidence in tech, he said.

An example this week was Texas Instruments Inc.'s midquarter forecast Tuesday. It said second-quarter earnings would be $0.40 to $0.44 a share, compared with its prior estimate of $0.39 cents to $0.45 cents a share. Though the upper end of the forecast was pulled down, the midpoint of the forecast still aligns to the $0.42 per share predicted by analysts polled by Thomson Financial. The TI shares slipped on the news, but the major brokerages, which forecast good profit margins and strong product cycles for the company, reiterated their positive ratings on the company.

All of this is happening in a market where corporate IT spending remains moderate. A recent ChangeWave Research poll, for example, reported that the percentage of companies planning to increase their spending on technology has fallen to its lowest point in the last four years. But demand among consumers and interest in certain technologies is strong.

For example, IDC this week raised its 2007 PC industry forecast. Vendors will ship 256.7 million units in 2007, a 12.2 percent increase from the previous year, it said. IDC had previously forecast a growth rate of 11.1 percent. Consumers were attracted by low prices on notebooks, Microsoft Corp.'s Vista, and the new generation of dual-core chips, IDC said.

For their part, venture capitalists are generally interested in Web 2.0, e-commerce, mobile communications and security technology, Innovation Advisors' Gebaide said.