Palo Alto Networks Seeking Twice Price of Peers in IPO
Palo Alto Networks Inc. is betting its growth prospects will justify a valuation that’s almost double the multiple for its rivals as it leads the busiest week for U.S. initial public offerings since April.
The provider of Internet-firewall technology plans to raise as much as $248 million in a share sale scheduled for July 19. The midpoint of the price range values Santa Clara, California- based Palo Alto at about 12 times sales in the 12 months through April, compared with an average of 6.2 times for competitors, data compiled by Bloomberg show.
Revenue at Palo Alto, led by Chief Executive Officer Mark McLaughlin, has surged at least 57-fold since 2008 as more businesses invest to shield their networks from outside threats. That pace may make the company more attractive to growth-focused investors than larger competitors such as Intel Corp. and Cisco Systems Inc., said Greenwood Capital’s Walter Todd.
“People are actively seeking out the next big thing in technology,” said Todd, who oversees about $940 million as chief investment officer at the Greenwood, South Carolina-based firm. “People are willing to pay a premium for growth when it’s scarce.”
Online-travel company Kayak Software Corp. (KYAK), Fender Musical Instruments Corp., teen retailer Five Below Inc. (FIVE) and Durata Therapeutics Inc. also are going public this week, adding up to the most U.S. IPOs since the week of April 30. The sales, which may raise more than $700 million, will test whether the U.S. market can sustain a recovery following a monthlong drought in the wake of Facebook Inc.’s disappointing IPO in May.
At least eight U.S. IPOs are scheduled for next week, from companies including eatery operators Chuy’s Holdings Inc. and Del Frisco’s Restaurant Group Inc., bolstering the pickup. The week’s offerings seek to raise more than $923 million combined, Bloomberg data show.
Palo Alto’s similar-sized peers such as Juniper Networks Inc. and Check Point Software Technologies Ltd. trade at an average of about 6.2 times last year’s sales, Bloomberg data show. Cisco trades at a multiple of 2 and Intel at 2.4.
While Palo Alto is asking investors to value it more richly than peers, its sales multiple is still less than half the 26 times revenue at which Menlo Park, California-based Facebook went public. Facebook sank as much as 32 percent within a month of its IPO.
That may have swayed technology companies to temper lofty ambitions. Cloud-based software maker ServiceNow Inc. (NOW), which originally sought to sell shares at a valuation of 13 times sales in its June 28 IPO, surged 37 percent on its first day of trading. Morgan Stanley, which has the lead role on offerings for both Palo Alto and Kayak, also managed the sales for Facebook and San Diego-based ServiceNow.
“Underwriters are taking an opportunity now to reset after what was a pretty rocky period right after Facebook,” said Christopher Casey, a managing director at SuttonBrook Capital Management LP, the New York-based hedge fund. “You’re much more interested and willing to pay up for what you think future revenue growth and growth in margins might be in two or three years. You’re buying into the growth story.”
The Standard & Poor’s 500 Index is trading 3.3 percent below its 2012 high amid concern corporate profits are shrinking. Analysts surveyed by Bloomberg project that earnings at S&P 500 companies fell last quarter for the first time since 2009.
Palo Alto, meanwhile, has shown improvement. Net income in the nine months ended April 30 was $5.34 million, compared with a loss a year earlier, with sales for that period approaching $180 million. The global market for enterprise network security may rise to $12.5 billion by 2015 from $10 billion this year, Palo Alto said in its filing, citing IDC.
Palo Alto and its investors are offering 6.2 million shares at $38 to $40 each, indicating a market value of about $2.6 billion at the midpoint of the range. Founded in 2005, the company is offering 4.69 million shares, while existing holders are offering the rest.
Venture firms Greylock Partners and Sequoia Capital aren’t selling shares and combined will own more than 41 percent of Palo Alto after the sale. The stock will list on the New York Stock Exchange under the symbol PANW.
Fellow technology company Kayak is scheduled to price July 19 alongside Palo Alto. Kayak, the operator of a travel website that first filed to go public in November 2010, is seeking as much as $87.5 million offering 3.5 million shares for $22 to $25 each.
The midpoint of the offering range would value Norwalk, Connecticut-based Kayak at $906 million, or about 3.7 times sales of $245 million in the year ended March 31, according to Bloomberg data. That’s 27 percent more than the median multiple of 2.9 for competitors such as Expedia Inc., TripAdvisor Inc. and Travelzoo Inc., the data show. Kayak will list on the Nasdaq Stock Market under the symbol KYAK.
Technology companies aren’t the only ones braving the market. Fender, the largest seller of guitars in the U.S., plans to raise as much as $160.7 million in its offering, also set for July 19. The maker of the Stratocaster model, used by musicians such as Eric Clapton and Jimi Hendrix, is offering 10.7 million shares at $13 to $15 each.
Weston Presidio, the San Francisco-based buyout firm that holds the biggest stake in Fender, is paring its ownership to about 18 percent from 43 percent as part of the sale, filings show. At the midpoint of Fender’s range, the company would be valued at $369 million, or about 0.5 times sales of $704 million in the 12 months through April 1, Bloomberg data show.
That’s similar to the multiple of 0.4 for Yamaha Corp. (7951), the Tokyo-listed maker of guitars, electronic keyboards, golf products and automotive interiors, according to Bloomberg data. Other guitar makers Fender names as competitors, such as Gibson Guitar Corp. and Taylor Guitars, are closely held. Fender will list on the Nasdaq Stock Market under the symbol FNDR.
Five Below, which sells clothes, toys and candy to teenagers for $5 or less, is seeking as much as $163.5 million offering 9.62 million shares for $15 to $17 each. Five Below is selling half of the stock in the IPO to repay debt, while existing holders are offering the rest.
London-based private-equity owner Advent International Corp., which is selling 2.8 million shares, will retain 52 percent of Five Below after the sale. The stock will be listed on the Nasdaq under the symbol FIVE.
The midpoint of the range would value Philadelphia-based Five Below at $863 million, or about 2.7 times sales and 62 times net income in the 12 months through April 1, Bloomberg data show. That’s more than triple the average price-to-sales ratio of 0.8 and earnings multiple of 20 for retailers such as Dollar General Corp., Dollar Tree Inc. and Big Lots Inc., according to Bloomberg data.
“In the case of Five Below, it’s a hyper-growth specialty retailer,” said SuttonBrook’s Casey. “It’s not unforeseeable that their revenue base could double over the next two and a half to three years.”
Durata Therapeutics is scheduled to kick off the pricings today, according to data compiled by Bloomberg. The company, which develops treatments for skin infections, plans to raise as much as $81.25 million selling shares at $11 to $13 apiece.
“You might expect some of these companies would wait a little longer for a slightly better market,” said Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co. “It’s an encouraging sign to see a number of companies coming.”
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