Tomorrow's initial public offering by OpenTable, the online restaurant reservation service, may be a sign that investors are regaining their appetite for riskier IPOs. How so? Despite losing $1 million last year, the company yesterday raised the target price it's seeking for its shares to as much as $18. That's not a move its underwriters would consider unless they anticipated many buyers.
If all goes as planned, OpenTable will raise a tiny $21.9 million in exchange for selling about 14 percent of its stock on Nasdaq. But Scott Sweet, senior managing partner at IPOBoutique.com, senses risk: Most of the handful of companies going public this year have been relatively recession proof, and OpenTable is anything but.
"The deal is obviously in great demand," says Sweet. "But if this breaks the offering price, it's a very dangerous stock."
Among the risks, there's last year's lack of profit. The company which makes most of its money from subscription and per-reservation fees it charges to restaurants, made $56 million in revenue last year, a 36 percent increase from 2008. But the bump was negated by skyrocketing payroll and technology costs as the company grew.
And because OpenTable is already working with a third of the 30,000 reservation-taking restaurants in North America, its potential for short-term growth may be somewhat limited. What's more, people won't dine out as much, especially at pricey eateries, if the economy remains in the dumps.
If those issues persist or grow, the stock could be poised for a fall, Sweet and other analysts say.
Still, if IPO investors really are salivating over riskier companies, it would be welcome news for venture capitalist and private equity funds that are desperate to take some cash out of the fledgling businesses they've backed. That, in turn, could free them up to invest in even newer companies, spurring innovation.
No one should get too excited just yet. This time last year, there had been 31 IPOs for more than $26 billion, according to Renaissance Capital's IPOHome.com. This year, there have been five for just $1.4 billion.
"I'll feel like things are getting back to a normal flow when we have a month with 10 IPOs," said Tim Walker of Hoover's IPO Central. As recently as a couple of years ago, twice that number was common.
What's behind investors' rediscovered taste for not-quite-sure things? "All five of the last IPOs have worked," posting big gains out of the gate, Sweet says. Four of the five were trading above their IPO price until yesterday.
SolarWinds, a tech company that already counts some 80 percent of the Fortune 500 among its clients, is also planning an IPO today. It, too, may quickly trade above its offering price.
In contrast, thanks to investors' "irrational exuberance," Sweet says, OpenTable may buck that trend.
Learn the most important step in structuring an investment portfolio.View Course »