Beware the Big-Name IPO
Manchester United (NYS: MANU) is one of the most storied professional sports teams in the universe. The soccer team has won three European Cups in its home continent and a record 11 FA Cups in its native England. With its estimated 659 million fans around the globe, "Man U" is arguably the most revered name in pro sports. But fame and recognition are no guarantees of success on the stock market. In fact, the team's just-launched IPO and recent history show us that they can be quite the opposite.
Looking for "likes"
Manchester United was hoping to place its shares at $16 to $20. Instead, the stock hit the market at $14 and barely budged during that first trading day.
Does that sound familiar? It should. The most prominent IPO of this year followed a similar trajectory. Facebook (NAS: FB) tried to leverage a massively popular website and immense brand recognition into a blockbuster stock market debut. That blockbuster ended up being more of a wet firecracker: On day one of trading, the stock barely treaded water above its issue price of $38 (thanks to the generous buying support of the company's underwriters). Since then, the stock has fallen, and it's not likely to rise anytime soon; on the back of a negative earnings report, it currently languishes barely above $20.
The bigger they are, the harder they fall, or so the lesson seems to go. Outside of those two stocks, the IPO market has generally been vibrant over the past two years. Sure, there have been flops, but many companies have reaped the benefits of a market where many bulls still run free. On its first day of trading, business social-networking site LinkedIn (NAS: LNKD) , for example, saw its shares rise sharply from their issue price of $45 and never look back. At the moment, the stock trades around $105.
In terms of operations, LinkedIn is a little guy compared to a Facebook or a Man U. According to company figures, its site has around 175 million users worldwide. That doesn't touch the 659 million supporters of the footie team or the more than 950 million people who utilize Facebook. Yet LinkedIn's stock market success gives it an eight-figure market cap that puts it in league with the much more popular Facebook and handily beats that of Manchester United.
The bigger the firm, the heavier the disappointment
Such performance gives heart to the fundamental investors out there. It's hard to rebuff the fundamental point of view in the lackluster Facebook and Man U IPOs. The former's uninspiring results have been well-documented. In its crucial first set of quarterly earnings since going public, Facebook reported a net loss of $157 million and admitted it needed to do better selling ads for its mobile apps -- the company's current hot growth market.
As for the soccer team, Glazer's 2005 acquisition (for $1.47 billion -- still one of the highest price tags ever for a sports franchise) left it saddled with hundreds of millions in debt. That isn't an amount that melts away quickly or easily, and in the subsequent years, Manchester United's debt level has grown alarmingly.
The company managed to retire much of that, but according to its unaudited figures as of this past March, long-term debt was still high at 417 million pounds ($654 million). Cash, meanwhile, amounted to less than 26 million pounds ($41 million).
Man U is the bluest of blue-chip sports franchises, but the same can't be said of it as a corporate entity. Revenue has been growing, but the bottom line has been relatively thin or in the red these last few years, and the company is anticipating a loss for 2012.
It's the fundamentals
It's almost indisputable that healthier financials are how the little guys have been beating these giants at the IPO game of late. Look at a young up-and-comer like Spirit Airlines (NAS: SAVE) , which hit the market in 2011. How many people have flown on one of the company's flights, as opposed to cruising around Facebook or watching a match beamed live from Old Trafford? Mere fractions, in comparison.
But the company has been posting some nice financial numbers: Its 2011 revenue of $1 billion-plus was a 37% year-over-year improvement, while it posted a net profit, as is its habit (a rare habit, by the way, for the airline industry. Not surprisingly, Spirit's stock has soared 64% above its IPO price.
Another little engine that could is real-estate website Zillow (NAS: Z) . The company doesn't have the positive bottom-line streak of Spirit Airlines, but it has been growing revenue admirably and in 2011 managed to end up in the black. It's also well-positioned to take advantage of a recovery in the American housing market. It trades at $38.83, nearly double its issue price of $20.
These positive aspects are largely missing in the recent histories of Facebook and Manchester United. They're big, famous companies, but fame and prominence also mean high expectations; people want the prospects to match the power. If those expectations aren't met, even the savviest underwriter in the world will find it hard to make the stock pop. It's not the size of the dog in the fight, as the saying goes; it's the size of the fight in the dog.
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The article Beware the Big-Name IPO originally appeared on Fool.com.Fool contributorEric Volkmanowns shares of Facebook. The Motley Fool owns shares of Linkedin, Facebook, and Zillow.Motley Fool newsletter serviceshave recommended buying shares of Facebook, Linkedin, and Zillow. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.