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Newcomers to share market investing considering ‘getting in on the ground floor’ with an investment in an Initial Public Offering (IPO) are confronted with a bewildering array of conflicting expert opinion.
On the one hand you can find many financial analysts and experts urging caution when considering an IPO. There are lists upon lists of things to avoid and things to look for.  In addition the fact the government recently tightened regulations to protect retail investors does not inspire confidence.
On the other hand you have article upon article extolling the stellar performance of many IPOs, particularly when compared to the ASX as a whole.  Some studies differentiate IPO performance by pre-IPO controlling interest. The following graph is an example.

On the surface the picture is impressive.  Over a ten year period more than 1,000 IPOs were studied with the conclusion that on average all IPO’s showed positive shareholder appreciation while those backed by private equity interests maintaining a greater than 25% post IPO stake provided stellar returns.  Looks great until you consider the time frame of the study – one year’s performance.
Certainly there are exceptions but it appears the majority of articles on financial websites touting the outsized share price gains of many IPOs look at the short term – from the first day to the first quarter to the end of the fiscal or calendar year during which the stock listed on the ASX.  Major market research firms like Deloitte publish yearly performance reports on the IPOs for the year.  
From the website businessinsider.com.au the following Deloitte report for the Top 20 IPOS for the 2015 Calendar year provide an example.  

While the share price gains in the first year are enough to get the blood pumping in the hearts of even the most skeptical investors, the second year performance is sometimes another story.  The table below revisits the 2015 Top 20, adding some additional comparative measures, including 1st trading day closing price; current share price; 2016 year end closing price; current percentage gain since original listing; and year over year (2015-2016) percentage gain.


IPO enthusiasts would point to the nine companies out of the Top 20 showing positive gains over two years. Naysayers would obviously point to the 11 stocks that morphed into negative territory in the second year of existence, some in dramatic fashion.  In addition, if you look at the nine remaining with positive returns, only two stocks gained ground in year two – Appen Limited (APX) and Graphitecorp Ltd (GRA). What’s more, four of the remaining seven showed negative share price appreciation between 2016 and 2017, with Class1 Limited (CL1) leading the pack with a 51% year over year decline, followed by Megaport Ltd (MJP) with a 21% drop; and QMS Media Ltd (QMS) and Baby Bunting Group (BBN) each dropping around 7%. 
In short, only two of the twenty remain on an upward trend.  Here is how that looks on price performance charts for each in comparison to the ASX 200.


Graphitecorp is a classic example of the kind of IPO that rings alarm bells in the eyes of some experts.  
First, those who tout looking for “hot” sectors, such as health care or technology, media, and telecommunications (TMT), are not generally big proponents of energy and resources stocks given the uncertainties surrounding the price of commodities and oil.
Second, Graphitecorp is considered speculative high risk as it is still in the exploration and development stages with not a dime in revenue or profit.  Some hard core analysts and experts go so far as to recommend never investing in an IPO that does not have a history of generating revenue as a private company.  Note that the share price of GRA was limping along in its early days, actually falling close to its first day trading price before taking off in July of 2016.  The company may be an exploration stage miner, but what it mines has been called the new “black gold” – graphite.  In July the company released a highly positive metallurgical report on its flagship project, the Mt Dromedary Flake Graphite site in Northwest Queensland. Immediately following the GRA made a very positive Investor Presentation.
The company claims Mt Dromedary is “one of the highest-grade flake graphite deposits in the world” and apparently ASX diversified investing firm Washington H. Soul Pattinson and Co. Ltd (SOL) agrees, becoming a JV partner with a 20% stake in Graphitecorp.  The metallurgical report was released on 20 July of 2016 and the following day GRA made an investor presentation at the Noosa Mining and Exploration Conference.  The presentation laid out the case for graphite as the new “black gold” due to its multiple applications from electric vehicle batteries to energy storage to heat resistant building materials.  It also pointed to existing infrastructure in the Mt Dromedary Location, drastically reducing the company’s need for capital expenditures to advance the project from feasibility to production.  
GRA is a very small company – market cap of $45 million – thinly traded – averaging 14,000 shares a day over three months – and investors may be growing hungry for more news.  The stock was trading around $0.78 in late September and has shed 33% of its value, dropping to its current price of $0.52.
Appen Limited (APX) appears to be the most successful member of the IPO Class of 2015, although its stock price has also declined over the last six months – 16% down from about $3.48 in mid-September to the current $2.90. 
The company came on the ASX on 7 January of 2015.  Appen is a technology company operating in the speech and text-recognition field since the early 1990’s.  In its first full year on the ASX the company reported 2015 revenues of $82.7 million, up 62% from its last year operating as a privately owned company, with a staggering 414% rise in net profit after tax – from $1.6 million to $8.3 million.  The company operates globally so the increases in constant currency – which takes exchange rate fluctuations into account – amounted to 35% for revenue and 144% for NPAT. Half Year 2016 results were equally stellar, if not more so.  Revenues on a constant currency basis rose 41% over the First Half 2015 results and profit was up 63%. The company has virtually no debt ($7,300 as of the most recent quarter) and total cash on hand of $13.07 million.  Appen’s customers include major automakers, government agencies, and according to the company – nine of the top ten technology companies in the world, beginning with Microsoft and Facebook.
Appen technology is used in automotive GPS systems and other voice recognition applications, but perhaps its most exciting contribution to date is Skype Translator, developed in conjunction with Microsoft.  The Translator allows Skype users of different languages to communicate directly over Skype in real time. Skype Translator currently has 50 languages in its repertoire and it is “machine learning”, meaning over time it adds vocabulary and idiomatic expressions to its data base without explicit programming instructions.
The company’s two year earnings growth forecast is +24.8% and its current P/EG is 1.05, with a Forward P/E of 20.93, which compares favorably to the average Technology/Software Sector P/E of 24.99.

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