Facebook may be grabbing the lion's share of IPO news coverage these days as the social network prepares to raise $5 billion from the public markets. But even as Facebook's planned IPO seems to be drawing some critical scrutiny, several smaller IPOs that went public under the banner of cloud computing are faring much better.
The latest example is Bazaarvoice (BV), which sold 9.5 million shares at $12 a share, above the initial range of $8 to $10 a share. Last Friday, on its first day of trading, Bazaarvoice closed up 38% at $16.51. The Austin, Tex., company monitors how company products and services are discussed on social networks and review sites. In some ways, Bazaarvoice is a test for bigger-name IPOs coming up -- Facebook as well as review site Yelp notably -- but since it hosts much of its word-of-mouth management software online, it's also grouped together with other recent cloud-computing IPOs.
A week earlier Brightcove (BCOV) went public, rising 30% on its first day of trading. Brightcove, which offers a cloud-based platform where its customers can publish online videos, has held steady since then, closing last week at $15.10, or 37% above its offering price. The firm's services are used by companies ranging from General Motors (GM) to Electronic Arts (ERTS).
There are some reasons for those warm welcomes. Both Bazaarvoice and Brightcove are experiencing the kind of healthy growth that investors like to see in newly listed companies. Bazaarvoice saw revenue rise 67% in its fiscal 2011 and 65% during the nine months through January 2012. Brightcove's 2010 revenue grew 21% and the pace picked up last year, rising 45%.
Both also have metrics that -- during recent, finickier IPO markets – have caused some IPOs to falter or not even get out the gate. Both posted net losses during their past two fiscal years, thanks largely to operating expenses that ate up most of revenue. And both saw negative cash flows during the same periods.
Neither Bazaarvoice nor Brigthcove is generating enough money yet to finance its own operations. Bazaarvoice says the upfront costs of acquiring new clients, coupled with the recording of revenue over an extended period, caused the negative cash flow. Brightcove also cites deferred revenue as well as accounts receivable because of an increase in new customers.
That can be seen as a red flag for IPO investors, since it can signal a company that's desperate for cash but that may not have a plan to become profitable. In these cases, being involved in the cloud industry is enough to give them a mulligan.
And there is some reason for investors to be optimistic. As cloud-computing companies scale up to take on more customers, their infrastructure costs don't rise as quickly. But there are also plenty of risks: any hot tech sector is bound to lure in new competitors, many of them with deeper pockets than startups that have been burning through cash.
Earlier this year, two other cloud companies enjoyed successful IPOs, each offering business software for specific industries. In late January, Guidewire Software (GWRE), which offers web-based software for insurers, raised $116 million in an offering that listed its shares at $13 a share. The stock, which rose 32% on its first day of trading, is now 81% higher than its offering price. In early February, Greenway Medical Technologies (GWAY), which helps physicians manage patient data, went public at $10 a share, raising $67 million. The stock also closed 30% up on its first day, and is now 45% above its offering price.
