Here are this week’s technology IPOs.
Connecture
Ticker: (NASDAQ: CNXR)
Expected to Trade: Friday, December 12
Price Range: $12.00-$14.00
Business Description
Connecture is a web-based software company that designs online marketplaces where consumers can shop for health insurance plans. The company provides personalized shopping based on individual preferences, health status, preferred providers, medications, and expected out-of-pocket costs.
Connecture’s customers include health insurance brokers and market operators looking for an efficient way to connect individuals with appropriate plans. Its software is currently used by more than 70 health care plans and powers over 30 private, state, and federal marketplaces.
Our Take
With the introduction of the Affordable Care Act (a.k.a. Obamacare), responsibility for buying health insurance is rapidly shifting from employers to consumers. New public exchanges mean shoppers are facing more health plan options than ever before, putting organized marketplaces in high demand.
By helping consumers navigate through the confusing world of health insurance and making insurance distribution more cost-effective for health plan providers and insurance brokers, Connecture is serving a largely untapped market. The company is already dominant in this space and should perform quite well in a post-reform environment.
Indeed, the benefits of a post-reform health plan market are already apparent for Connecture. For the first six months of 2014, the company posted revenue of $35.3 million, compared to $19.3 million (an 83% increase) for the same period in 2013. The company also cut its losses from $18 million to $12.1 million in the same time frame despite increasing operating expenses (primarily attributable to R&D) to $4.6 million.
Connecture is currently sitting on an $88 million backlog and $49 million in debt, which will be paid down with IPO proceeds. The company is expected to raise $75 million come Friday, so the debt issue is of little concern.
According to Connecture, there are approximately 50 million people who do not have health insurance and will be shopping for it soon and an additional 25 million working for employers who will soon switch from offering one plan to offering multiple options.
That’s a total of 75 million individuals who will access insurance exchanges, 84% of which have zero experience shopping for health plans online.
The demand for web-based software is ripe for the picking, and Connecture is very well positioned. We’re fans straight out of the gates.
Hortonworks
Ticker: (NASDAQ: HDP)
Expected to Trade: Friday, December 12
Price Range: $12.00-$14.00
Business Description
Hortonworks is among a growing number of companies leveraging big data storage and analysis engine Apache Hadoop to help corporate customers process huge amounts of data.
Despite being significantly smaller than its main competitor, Cloudera (a $659 million valuation vs. $4 billion), Hortonworks will be the first Hadoop vendor to hit the public market.
According to Hortonworks, its mission is to “establish Hadoop as the foundational technology of the modern enterprise data architecture.”
Applications for the big data processor touch a wide range of industries including, but not limited to, banking, health care, retail, manufacturing, and energy. The company’s services involve managing information harvested from machines and sensors, social media posts, geolocators, web clickstreams, medical databases, and just about anywhere else you can think of.
Put as simply as possible, Hortonworks is an all-encompassing play on the burgeoning field of big data.
Our Take
Admittedly, our understanding of the Hortonworks platform is limited, to say the least. We’re not developers or system administrators over here, so it’s difficult for us to say how exactly Hortonworks separates itself from the competition.
What we can tell you is that the company’s versatile software is used by a wide range of customers and partners including Bloomberg, eBay, Spotify, TrueCar, HP, Microsoft, and Rackspace.
The demand for the company’s data analytics is clear not only in through customers and partners, but also through the company’s bottom line. Hortonworks more than doubled its revenue in the last year, posting $33.4 million in the first nine months of 2014, compared to $15.9 million during the same period in 2013.
At the same time, though, the company has nearly doubled its net loss. Hortonworks has shifted from $48.4 million in the red to an alarming $86.73 million loss for the first three quarters of 2013 and 2014, respectively. Technically, the company is growing revenue faster than it’s increasing losses, but the numbers are just too startling to ignore.
Until Hortonworks can make its way towards profitability, we’re staying as far away from this one as possible.
Metaldyne Performance Group
Ticker: (NYSE: MPG)
Expected to Trade: Friday, December 12
Price Range: $18.00-$21.00
Business Description
Metaldyne Performance Group (MPG) is an industry leader in complex metal-formed components in powertrain and safety applications for the automotive industry. The company was recently formed through the merger of three metal-forming technology companies: HHI Group, Metaldyne, and Grede.
Services include various forms of forging, casting, and component assembly.
MPG focuses on components that are essential to vehicle performance, fuel economy, and safety. These are among the largest and fastest-growing dollar content categories inside a vehicle, according to MPG.
The company has a wide global footprint, spanning across 61 locations in 13 countries, with over 12,000 employees.
Our Take
At least one of MPG’s components is found in 90% of light vehicles built in North America and over 60% of the top 20 engine and transmission units. The company is clearly a powerhouse in the powertrain industry, but its high level of market penetration leaves little room for growth.
The combined operations of the three suppliers generated $79.9 million in net income and $3.05 billion in revenue in 2013, according to MPG’s prospectus. During the first six months of 2014, MPG generated $38 million in revenue (down from $42 billion in the same period 2013) and $1.2 billion in income (up slightly from to $1.0 billion in 2013), putting it on track for a relatively flat year.
Metaldyne is a safe play with wide margins and a deep moat. Just don’t expect any big moves from it on the market.
Momo
Ticker: (NASDAQ: MOMO)
Expected to Trade: Friday, December 12
Price Range: $12.50-$14.50
Business Description
Momo is a Chinese social media hook-up app (think along the lines of Tinder, but with more functionality) with 180.3 million users, 60.2 million of who are active on a monthly basis.
Momo focuses heavily on location, connecting people based on their proximity to each other as well as their shared interests. The idea is that you can find people who are hanging out at the same bar, club, or pub, and connect with them through the app.
I know, I know. Why can’t they just say hello to each other in person? It’s a good question, but that just seems to be the direction social interaction is moving.
Momo relies on three avenues for revenue generation. The first is a “freemium” model, in which the app is free to download, but users can pay for premium accounts with additional features. The second is digital content, such as in-app purchases, games, premium stickers/emoticons, etc. The third is a mobile marketing service in which companies can set up a business account and offer special promotions to nearby Momo users.
Our Take
At 180 million users, Momo is second only to WeChat in regards to Chinese mobile social apps.
The company has been successful in growing its top line since the start of 2013. It reported $13.9 million in the first six months of 2014, up from $3.1 million in the same period the year prior. 63% of total revenue was generated from subscriptions, which is good news for Momo considering the recurring nature of that vertical.
Momo approached profitability at the start of 2014 but increased its losses significantly in the second quarter.
Figure credit: Technode
Of course, like just about every other social media company hitting the market, Momo is a growth play, so investors shouldn’t be too concerned with the bottom line so long as revenue is growing at a healthy pace.
Here’s a bit taken from the company’s prospectus on its intended growth strategy:
The most critical element in our growth strategy is to rapidly expand our user community. China has the world’s largest smartphone population and is currently our biggest market…
We will continue to build our presence among Chinese speaking populations around the world and seek to foster a broader and more engaged user community. We also plan to launch a new mobile application designed to attract English speakers.
The building of an app for English speakers is likely the culprit behind Momo’s recent increase in operating expenses. Considering the fact that China has been banning messaging apps left and right, it’s certainly a good sign the company is diversifying its product portfolio.
China’s large market offers Momo significant growth potential, but the nation’s history of strict censorship makes any social media company a risky venture.
We like Momo as a speculative play, and we’ll like it even better if the company can put out a strong English-based product, but for now it’s a fairly high-risk, albeit high-reward, stock.
