The 1 Internet IPO You've Never Heard Of

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Zynga, Zillow, and Zipcar, oh my! The market has seen a lot of hot offerings this year, and is rabidly anticipating the public debut of Groupon and Zynga, among others. Foolish investors know better than to chase after the Next Big Thing, preferring to take a look at each company's fundamentals before diving into the deep end.

One company that's flown (somewhat) under the radar is Demandware, a provider of e-commerce solutions to various retail-oriented companies, including Barneys New York, Columbia Sportswear, and Crocs, according to the S-1 filed in mid-July.

Show me the money
Since you're reading this online, the odds are pretty good that you've bought something online in the past year. It's almost impossible to escape the tentacles of e-commerce, but not every company wants to sell its products on Amazon.com. Demandware's S-1 notes that global e-commerce accounted for $316.5 billion in 2010 and is expected to more than double by 2015. Also reassuring, Demandware won't have to compete directly with Amazon. Even more assuring, it seems pretty safe that even if companies choose to sell their goods via Amazon, they'll probably still want a way to sell goods on their own websites as well. Since Demandware receives a portion of gross revenues from any sales made through the e-commerce platforms it sets up, there is great potential for growth while staying out of Amazon's way.

Demandware first turned a profit last year, narrowly eking out $309,000 on gross revenues of $36.7 million. Although not overly impressive, remember it took Amazon eight years to turn a profit. The biggest problem I see is that the company posted a loss in the first quarter of 2011, but I'm willing to give Demandware the benefit of the doubt; it's focusing heavily on sales and marketing, nearly doubling those expenses over last year, at what appears to be a sustainable rate given its income growth.

Demandware's cash flow statements show positive momentum, and accounts receivable are growing slower than revenue -- also a good sign. In a competitive industry, it's important to be able to keep your clients happy without extending them repayment terms that are too generous. Half of Demandware's revenues come from its apparel industry partners -- notably Columbia and Crocs, which both reported strong e-commerce sales increases in recent filings. Demandware had better hope that recent economic uncertainties don't undermine interest in insulated jackets and rubber shoes!

Shop anywhere, shop everywhere
Speaking of the competition, Demandware mentions these competitors in its S-1 several times, specifically naming eBay's (NAS: EBAY) recently acquired subsidiary GSI Commerce, and Digital River (NAS: DRIV) . Both companies boast big leads on Demandware in terms of revenue. GSI's massive client portfolio, which lists many top fashion brands as well as some popular niche products, will be a big hurdle for Demandware to overcome. Digital River's portfolio is also impressive, naming a number of top software publishers.

Scaling up will help, and Demandware has some solid growth numbers, claiming a 82.5% compound annual growth rate, or CAGR, for the number of e-commerce sites on its platform (from 39 to 237 in 2008-2010), while improving revenue by a CAGR of 70% in the same time period. That's a good growth clip compared with Digital River's drop in revenues from 2009-2010. Demandware has specifically targeted small and mid-size businesses in the strategy section of its S-1. This is a great strategy, especially if Demandware can sign up more nascent word-of-mouth sensations like Crocs for their e-commerce platforms.

Another great play would be to increase presence in mobile e-commerce, especially with apps built for the more robust tablet experience. While Demandware does not mention tablets specifically, it does see mobile commerce as a driver of future growth. A recent New York Times blog piece noted that tablets account for a disproportionate percentage of mobile e-commerce relative to their market penetration, so Demandware would be foolish (lowercase) to ignore this opportunity.

Playing the middle
Demandware has been growing, but its big competitors seem to have a meaningful head start. It's going to take a combination of superior service and superior software to match or unseat them. The $100 million the company seeks to raise could go a long way to making that dream into a reality. Focusing on the mid-level retailers that larger competitors might overlook will help, but a lot rides on the company's ability to convince potential partners that it can help grow their online business in an uncertain economic climate.

At the time this article was published Fool contributorAlex Planesowns no shares of any companies mentioned here. The Motley Fool owns shares of Zipcar.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, eBay, Zipcar, and Digital River. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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