Castlight Health pops 149% on its IPO despite a revenue multiple not seen since 2000

Castlight Health pops 149% on its IPO despite a revenue multiple not seen since 2000

BY MICHAEL CARNEY 
ON MARCH 14, 2014

Viewed in the context of the dozens of tech IPOs grabbing headlines from Silicon Valley and Wall Street over the last six months, Castlight Health’s public debut this morning and the overwhelmingly positive market response are hardly unique. Wall Street is remembering what it’s like to lust after high growth tech equities. But where the deal did stand out is in the valuation it commanded.

Not since 2000, at the tail end of the last big tech bubble, has a company priced its IPO as aggressively as Castlight. On the day before its Friday debut, the company and its underwriters (led by Goldman Sachs and Morgan Stanley) set the targeted offering price range at $13 to $15 per share. A day later, the company upped that figure even further, ultimately pricing the offering at $16 per share.

At this price, the company had a $1.4 billion valuation. But, what’s more staggering, is that at $13 million in 2013 revenue – it lost $62 million on the year – the company is being priced at a 107-times revenue (not earnings). To reiterate, not since 2000 when companies like WebVan and Pets.com were the topic of investor interest have valuations like this been seen in the sector.

This led the Echange’s Aaron Pressman to dub the stock the “Most overpriced IPO of the century.” He writes, “Of the prior 13 deals priced at 100 times revenue or more and sales of at least $10 million, the average 3-year return was -92%.”

Seeking Alpha contributor Don Dion, on the other hand, agreed that the offering was “mispriced,” but instead determined that the stock was underpriced given the “sector and strong tech IPO demand.” Dion informed his readers of plans to buy the IPO.

As of the close of trading, Castlight was up 149 percent at $39.80 per share, suggesting that the markets agree with Dion rather than Pressman. The stock continues to rise in after hours trading.

The ideal size of a post-IPO “pop,” or the increase in price during the first day of trading, has been hotly debated within the tech sector of late. Too big a pop and companies feel like they left money on the table, or by the same token suffered unnecessary dilution. Too small of a pop, and many investors begin to question market sentiment around the underlying company.

Facebook’s IPO, which is among the most heavily-dissected offerings in tech history, was dubbed a success by many close to the company precisely because the stock didn’t pop, closing just barely above its offering price (NASDAQ’s colossal fuck-up notwithstanding). That said, the stock soon fell well below its offering price, and only after several positive quarterly earnings reports did it regain those losses. Twitter, on the other hand, was up 73 percent by the close of its first trading day and  continues to trade ahead of its IPO price, despite being down from its all-time highs at the moment following weak earnings. But which strategy is ultimately right?

I was due to speak with Castlight co-founder and CEO Giovanni Colella today at 10am PST and had hoped to ask him about the company’s strategy around pricing today’s offering. Unfortunately, Colella stood me up – we’ll forgive him given what was surely a demanding day – and I spoke with CastLight’s Chief Revenue Officer Michele Law, instead.

Law deferred comment on financing strategy to Colella or Castlight CFO John Doyle – we were unable to speak with either – but instead addressed the impact being a public company will have on the company’s future business.

“It validates the enormous opportunity we are addressing,” Law says. “Enterprises spend $300 billion on healthcare annually, 30 percent of which research shows is wasted. It’s among the Top 3 expenses for American businesses and growing.”

The visibility of being a public company, particularly one with a blockbuster IPO, will benefit Castlight from a brand-awareness perspective as well, Law believes.

“If people don’t know about us already, they will soon,” she says. “Businesses are certainly aware of the problem.”

Whether you view Castlight’s IPO valuation as excessive, or simply indicative of the massive trends it’s riding – soaring healthcare costs and enterprise-wide adoption of big data solutions –  the company now has more than $175 million in new capital with which to continue building its business.

“It will be business as usual Monday morning,” Law says.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: