Pricing a new company involves much more than financial math. There are two competing interests: the stock issuers (i.e., the firm that is going public) wants to get as much money as they can from the deal, but they also don’t want their stock to suddenly drop, because this could make it harder for the company to raise capital in the future and just generally look bad. Similarly, the investment bankers want to get as much money from the deal as possible, and the bigger the deal the more money they make, but they also don’t want the stock to drop too much, because it can make them look bad to future potential companies considering an IPO.
In this sense, pricing an IPO involves a bit of mind-reading: what price can the market bear, and how will that change?
This was probably a big concern for Opera (OPRA), which has announced an IPO at $12 per share, a bit above the average of estimates of $10-$12. The fact that it’s pricing at the higher point is a bit daring and surprising; this week both Facebook (FB) and Twitter (TWTR) saw their stocks plunge, and the world is becoming much more doubtful of social media as a concept.
Perhaps Opera and/or its underwriters thought that they can capitalize on that by saying that their business model, which is online advertising-based, is somehow different—and different enough to benefit from FB’s and TWTR’s losses. Yet that flies in the face of Alphabet’s (GOOG) 2.4% drop at the end of last week, in sympathy with the social media companies. And that’s important, because OPRA gets 43.2% of its revenue from Google being used in its browser.
The numbers are interesting on their own. OPRA will offer $115 million worth of shares, a relatively small IPO; its total market capitalization will be about $1.2 billion. Last year, OPRA’s revenue was $128.9 million, and revenue rose 25.3% year-over-year in 2017. P/S is thus about 9.3 (typical for the sector), while its P/E ratio is a modest 30 (based on last quarter annualized).
This is very good pricing; because Opera has already made a profit, it will look much more attractive, and the very small offering means demand will be very high in the IPO. It’s no surprise that OPRA shares rose 30% on its first trading day, even when FB, TWTR, and GOOG are all going down.
And this is where the art of IPOs meets the science of financial mathematics: the underwriters priced the stock at a moderate P/S ratio, which is the most important metric for this sector, and that looked even more attractive since OPRA is already profitable (while earnings aren’t as important for tech firms when they IPO, having them is a sweetener). If we had to guess at the underwriters’ strategy, it could be that they felt a modest pricing would give the pop that they needed now, even if that pricing was a bit higher than the extremely conservative estimates that proceeded the IPO.
Now that OPRA is public, it will need to stand on its own, and watching this story evolve will be interesting. But the investment banks that set up this job did it well—and now their work is done.