Usually, IPOs that turn out to be turkeys stay turkeys for quite some time.
Occasionally, though, you get a stock like Ruckus Wireless Inc., a Sunnyvale, California company that provides services for Wi-Fi networks.
Ruckus went public Nov. 16 at $15 (U.S.) per share, the high end of its proposed pricing range. It then shed 18 per cent of its value in the first day of trading, closing at $12.25 per share.
That might have been a rational reaction: The decline knocked Ruckus Wireless’ trailing price-to-earnings down to about 30, not bad for a company that nearly doubled its sales in the first nine months of 2012 from the prior-year period.
The market has quickly decided, however, that the shares were oversold. Ruckus Wireless shares were among the top gainers on the entire New York Stock Exchange twice this week. They touched $17.75 in Friday’s trading, a 44 per cent gain from its first-day low.
There have been no material announcements from the company this week, but it has put out a string of press releases touting the use of the company’s products by phone company Cincinnati Bell and a number of hotel chains.
At Friday’s high, Ruckus Wireless now has a market capitalization of nearly $1.3-billion – and that’s putting its valuation into nosebleed territory.
Why? As analyst Francis Gaskins of IPODesktop notes, the company had a $17.7-million extraordinary tax benefit in the last 12 months. Take that out, and the company posted just $11.5-million in net income available to common shareholders. That makes the trailing P/E close to 112.
The company’s enterprise value – market capitalization plus net debt – is more than 50 times its EBITDA, or earnings before interest, taxes, depreciation and amortization.
Mr. Gaskins said Ruckus Wireless looked “OK” at its IPO price of 15, based on increasing sales and profits. With its valuation “on the high side,” however, “any slip in the sales and earnings progression could be costly for shareholders.”
True at $15; even more so as the shares push $18.