In an auspicious initial public offering, Palo Alto Networks’ shares jumped nearly 27 percent above its opening price Friday, indicating that tech investors haven’t been turned off to new ventures by Facebook’s flop in the public markets.
But experts cautioned that not just any business can expect to have a successful IPO.
“We’re not ready to take out the horns and say the Facebook IPO didn’t hurt,” said Scott Sweet, senior managing partner with IPO Boutique, calling Facebook’s public-market pratfall “a catastrophic mess.” But he said the experience of Palo Alto Networks shows that investors will embrace companies “with a strong niche, low debt and a revenue stream that is showing strong growth.”
One promising business area is software. Besides Santa Clara-based Palo Alto Networks, which makes hardware and software to secure computer networks, another successful IPO Friday was Connecticut online travel firm Kayak Software, whose shares rose 28 percent above its opening price.
Palo Alto Networks, which sells firewalls to block computer viruses, on Thursday had raised $260 million after pricing its 6.2 million shares at $38 to $40, up from an earlier range of $34 to $37. The shares began trading Friday at $42 and stood at $53.12 when the market officially closed.
The company’s sterling debut “is a good sign that investors are willing to take on some risks,” said Tim
Cunningham of Thornburg Investment Management, especially since many companies held off going public after Facebook’s poor showing. But he cautioned against assuming “that you can get any IPO out the door,” adding that investors liked Palo Alto Networks because of its technology and “really good growth.”
David Golden, executive chairman of the San Francisco bank Code Advisors, agreed, noting that Palo Alto Networks “is nicely profitable and it has a long operating history with good management. Even in bad markets you’ll find demand for that kind of company.”
Unlike Facebook, which markets itself to consumers and depends on online advertising, Golden said, Palo Alto Networks makes money by selling its products to businesses. Other Silicon Valley companies that target businesses and have seen their share prices rise since going public in the past year include software companies Splunk, Jive Software, Proofpoint and Infoblox.
Founded in 2005 by former Check Point engineer and OneSecure co-founder Nir Zuk, Palo Alto Networks last year brought in former VeriSign CEO Mark McLaughlin as CEO to lead it through its public debut.
“We’ve reinvented the firewall,” McLaughlin boasted in a telephone interview from New York on Friday. “Our next-generation firewall allows enterprises for the first time to safely use any application they want to use.”
The company, whose revenue has steadily grown over the past three years, is headed for its first year of profitability, showing a net gain of $5.3 million in the first nine months of its fiscal 2012, which ends July 31.
It drew criticism earlier this week from Check Point Chairman and CEO Gil Shwed, who told an Israeli journalist, “we have better technology and we have many more customers and installations,” adding, “I think that there is little chance that Palo Alto will be a success.”
In addition, because the IPO values Palo Alto Networks at a much higher price-to-earnings ratio than competitors, including Check Point, some people question whether it can continue to grow revenues at a high enough rate to justify its initial valuation.
But on Friday McLaughlin disputed that, saying. “we’re growing at a factor faster than the market, so that’s why you’re seeing those valuations.”
The IPO market has been stagnant for two months, as Facebook’s bungled market appearance and unstable price — along with concerns about the economy and general stock instability — have kept startups on the sideline.
Facebook debuted on May 18 and Nasdaq’s inability to handle the volume of trades, along with whispers of falling revenue projections, caused the stock to tumble in its first two weeks of public availability. Its shares fell below its $38-per-share IPO price and have stayed lower, closing Friday at $28.76.
The fallout resulting from Facebook’s IPO was seen in June, when only four companies went public, the lowest total for any month since the deepest point of the 2008 recession, according to financial analysis firm PrivCo. Before that, an average of more than 13 companies were moving to the U.S. market every month in 2012, which was still below the pace set last year.
Contact Steve Johnson at [email protected] or 408-920-5043. Follow him at Twitter.com/steveatmercnews