An Outsider's Best Chance At Massive IPO Gains

David Goodboy's picture

Monday, December 19, 2016 - 11:30am

by David Goodboy

Initial public offerings (IPOs) can be the most profitable stock market investments on the face of the earth. Every investor has heard tales of, or been fortunate enough to participate in, newly issued stocks that have returned gains in the hundreds of percentage points over the holding period.

Often, it's only the insiders who can earn those incredible returns from an IPO. This is because the underwriter of the IPO deal allocates shares to its ideal institutional client, who in turn typically distributes them to their best customers at the public offering price. Unless you are a major customer of the institution or have insider connections there, the odds of getting in first are slim to none.

Those lucky enough to obtain an allocation can sell the shares for a fast profit, a tactic known as flipping. Fortunes have been made by investors who get the chance to participate in this lucrative technique.

However, it is important to note that employees and company officials are barred from flipping their shares for a profit. Called a lock-up, this SEC rule mandates that employees and management not sell their IPO shares for a minimum of 90 days after the IPO date. The lock-up period varies by agreement and could be as long as 24 months.

Lock-ups are critical to analyzing IPOs, as many company insiders may decide to cash in once the lock-up expires. Obviously, this does not mean that there is anything wrong with the shares, just that the insiders are anxious for the cash! When the lock-up expires, the selling pressure often causes the stock price to plunge for a short time. And for outside investors, this is the best time to buy the shares.

Not Every IPO Is A Winner
It's important to note that not every IPO takes off around the issuing date. Many languish around or even fall much lower than the IPO price for long periods of time.

Facebook (Nasdaq: F) comes to mind as a non-performing IPO. Heralded as the world's largest IPO, the stock finished the first day of trading flat from its offer price. The Facebook IPO was not only disappointing but also detrimental to the broader market due to the hype and its sheer size. The entire IPO market went silent for 41 days after this monumental disappointment.

Even more insidious are IPOs that surge during the first few sessions, only to plunge the next week or month. Flippers are the only traders who can profit from this type of move, and sometimes even the flippers get stuck with losses.  The other party that stands to benefit from this type of IPO is outsiders, who can patiently wait for the initial hype-based moves to finish before pouncing on cheap shares.

I've identified this type of opportunity with Nutanix (Nasdaq: NTNX). The company provides an enterprise cloud platform that combines sever silos, virtualization, and storage into an integrated solution.

Right off the bat, the shares delighted IPO flippers with a 40% gain on the first day of trading. However, the return was not so great for those non-insiders who bought shares on this initial explosion. The share price quickly drifted lower into the low $22.00 per share zone after trading as high as $46.00 per share.

But the decline wasn't due to poor results. The company posted solid first-quarter results, beating estimates with a 90% gain in revenue. Billings were higher by 87%, cash and short-term investment added 155%, and deferred revenue climbed 160% year-over-year.

The net loss was higher during the same time frame. But what really sank the share price was likely investor nervousness about larger web infrastructure companies taking market share. Firms like Hewlett-Packard and Cisco have been cited as moving into Nutanix's market.

However, the numbers still show a growing company. Nutanix wrapped up the first quarter of fiscal 2017 with a total of 4,473 end-customers, adding a total of 705 end-customers during the quarter. Customer growth is a strong bullish sign.

Also, large deals are on the upswing. Large end-customers continue to invest in Nutanix, with cumulative end-customers with lifetime bookings over $1 million growing to 256 in the quarter.

The recent addition of PernixData and Calm.io will enable the company to accelerate and further automate the delivery of its Enterprise Cloud operating system.

Dheeraj Pandey, chairman and CEO of Nutanix bullishly stated, "Our first quarter results are reflective of the strength of our thesis on how enterprise computing will morph in the coming three to five years."

"The backdrop of our $100 billion addressable markets continues to provide many opportunities for disciplined growth," said Duston Williams, chief financial officer of Nutanix. "This quarter our federal business significantly contributed to our high performance. We also are pleased with the evolution of our business model, with this quarter marking the fourth consecutive quarter of positive cash flow from operations."

Risks To Consider: As in all high-tech companies, the competitive threat is very real. Companies need to continually innovate to stay relevant in the marketplace.

Action To Take: Buy now near $30 per share. Initial stops are suggested at $19.93 per share, and my target price is $60.00 per share.

Editor's Note: This year, the SEC cracked open a door it had kept shut since 1933. They finally allowed everyday investors to get into explosive early-stage companies BEFORE they go public -- while they are still in their strongest growth curves. But here's the thing... there's only one way you can get into these startups -- and here's how it works.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.