By the time Zynga (Nasdaq: ZNGA), Groupon (Nasdaq: GRPN) and Facebook (NYSE: FB) all fell out of bed after much-hyped initial public offerings (IPOs), it was easy to dismiss this corner of the market as "all hat and no cattle." Yet 2012 has also brought forth several other young companies that appear to possess impressive long-term growth prospects. In recent weeks, I noted the stellar quarterly results from recent IPOs Splunk (Nasdaq: SPLK) and Infoblox (Nasdaq: BLOX). And now you can add Palo Alto Networks to the mix.
Palo Alto, which makes network security software, appears to have built a robust technology platform, if customer adoption is any guide. In its first quarter as a public company, Palo Alto delivered an 88% jump in sales from a year earlier, to $76 million. And a modest profit exceeded the consensus forecast of break-even results. Palo Alto, which was founded less than 10 years ago, already has 9,000 corporate clients and controls 3% of the global network firewall market, and analysts at Lazard see that figure rising to 5% by 2015.
Still, shares are dropping more than 7% in today's trading. Blame it on profit-taking. Palo Alto's shares, which opened for trading in the low $50s in late July, moved up roughly 40% in the six weeks prior to Monday night's quarterly report. The company's (pre-drop) $4.8 billion market value implied that the Palo Alto would need to deliver scorchingly good results to keep this stock moving yet higher.
Today's sell-off is not a buying opportunity. That's because investors need to digest the fact that growth -- while expected to be quite impressive -- will start to slow, simply because it's hard to keep expanding sales at a nearly 100% pace. Of equal concern, IPO investors have begun to fixate on lock-up expirations, and Palo Alto's insiders will be freed to unload large blocks of stock this coming January. Lastly, the ever-rising market may reverse course soon enough, leaving especially pricey stocks (Palo Alto trades at 10 times projected fiscal 2013 sales) vulnerable to a sell-off. Investors may get a second stab at this high-growth company at a notably lower stock price down the road.
Shuffle Master's hiccup
After a number of estimate-topping quarters, casino equipment provider Shuffle Master announced a second consecutive subpar quarter on Monday evening, pushing shares down more than 4% this morning. Yet this may be a case where less is more. Shuffle Master's earnings per share trailed the 20-cent consensus forecast by two cents largely because the company is spending heavily to roll out new products for casinos by the end of the year.
Toiling in the shadow of industry giant Bally Technologies (NYSE: BYI), which has a 150% larger market value, Shuffle Master is actually seen as one of the industry's top innovators. The company has a knack for developing new table games and other gear that often end up being copied by the competition.
Analysts at KeyBanc consider Shuffle Master to be "our favorite small cap gaming name and remains one of the best ways to participate in the expansion of gaming around the globe. Its diverse product line and strong IP portfolio allow it to capitalize on opportunities in every gaming jurisdiction." Their $21 price target, nearly 50% above current levels, assumes that shares will trade up to 10.8 times forward EBITDA, right in line with this stock's historical average.
Another volatile biotech
Navidia Biopharma is today's biotech blow-up du jour. The company announced on Monday evening that the U.S. Food and Drug Administration is not pleased with Navidia's contract manufacturing partners. The FDA also suggests the company do a better job of ensuring quality control ahead of an imminent possible approval of Lymphoseek, which helps locate lymph nodes in cancer patients.
Shares of Navidea had risen above $4.50 in late July on hopes of a late 2012 launch for Lymphoseek, but shares are now down nearly 50% since then on this setback. Notably, this is not a rejection of the company's device -- it should be seen instead as a delay. Analysts at Think Equity still see Navidea garnering $130 million in sales by 2016, which means the entire company is now valued at just 1.5 times that figure. That's pretty cheap for a new medical device company -- and for patient investors, this stock could easily move back above the $4 assuming the FDA concerns are addressed over the next six to nine months.
Action to Take --> Navidea is clearly a speculative play because the FDA can keep stalling Lymphoseek's launch until it is satisfied that production processes are up to snuff. Still, this seems like an overreaction. Shuffle Master has a solid long-term track record in the casino industry, and has always produced a profitable trade when it temporarily moves out of favor.