Wall Street pundits are fingering the uncertainty of interest rates as the main culprit behind the less-than-glamorous debut of many initial public offerings in August.
However, these fears seem to have lessened after the U.S. Federal Reserve decided to raise the federal-funds target rate and discount rate by only a quarter percentage point. Now some observers are bracing for a new IPO stampede and expect life to be breathed back into some slumping recent offerings.
1800Flowers.com Coming Back
For instance, just after the Fed’s announcement last week, 1-800-Flowers.com, Inc. traded above its $21 offering price for the first time since it made its Wall Street debut at the beginning of the month.
Another sign that investors may have lost their interest rate jitters is the strong debut made by Bamboo.com, Inc.. The Palo Alto, California-based company, whose software enables online tours of houses, saw its stock close last Thursday at $17.56 after initially pricing 4 million shares at $7.
The Line Forms Here
Another encouraging sign that the IPO chill could have lifted is the number of new issues lined up for September. So far, 50 IPOs are expected to debut in the month — with the bulk of them coming to market in the last three weeks.
While all of this activity sounds encouraging, Wall Street’s mood can change faster than the path of a hurricane. An off-the-cuff remark by Fed chairman Alan Greenspan can instantly change the uphill stampede of a bull market into a bear running downhill fast. In addition, if inflation becomes a concern once again and interest rates are jacked up a point or two, investors are prone to jump out of the equity market in search of a sure thing — like high-interest corporate bonds. Moreover, even though the Y2K panic has seemed to recede, there’s a strong possibility it could come back strong by the end of the year.
But Quality Will Prevail
Nevertheless, I believe that quality Internet IPOs with good ideas and marketable products will still flourish, regardless of market or interest rate gyrations. A case in point is Red Hat, Inc., the largest distributor of Linux. After its successful IPO earlier this month — the same month that other IPOs wilted –Red Hat now has a market capitalization of over $5 billion.
So while it’s good that the prevailing market conditions may spawn yet another IPO explosion in the coming months, it’s also good sense for investors to go beyond the hype and check out the fundamental soundness of an IPO before plowing their hard-earned cash into it.
What do you think? Let’s talk about it.