Almost Is Not Good Enough For Athena

The Hot IPO Trader
Tuesday, September 18, 2007
By Louis Basenese

Email – #165

** Almost Is Not Good Enough For Athena

Forget about what the Fed does today. We’re passing on Athenahealth (Nasdaq: ATHN) based purely on fundamentals, not market conditions… or any uncertainty about where the market will head next.

I must say, though, that the recent IPO lull made this decision more difficult. You see, Athenahealth is a tempting opportunity because it almost meets our selection criteria.…

The offering size is just below our $100 million minimum. Not all, but a good portion of the proceeds will fund growth. Insiders are retaining a significant stake at 45%, although ideally we’d prefer to see them retaining more than 50%.

Its business – providing Internet-based business services such as billing and workflow management to physicians – is viable. In fact, it’s an $18 billion industry growing a steady 7% per year.

Even more compelling, Athenahealth possesses a long-term growth opportunity with only 2% market penetration and an online model that will certainly benefit from the powers of leverage as it continues to add clients.

It also boasts revenues in excess of $50 million in the past year – a key threshold which academic research proves is a strong predictor of aftermarket success. Plus, a good portion of these revenues are recurring, and thus predictable, as 97% of the company’s clients renew their contracts each year.

But, in this case, almost is not good enough.

Here’s the key sticking point – Athena is not yet profitable. And while there are times when I’ll make exceptions, this is not one of them.

Athenahealth is up against some strong competitors (including heavyweights GE Health and Siemens Medical Solutions). And to date, there’s no indication its technology and web-based approach confer long-term competitive advantages.  Not to mention, even with 10,500 customers, there are no signs profitability is imminent.

In the end, I’m recommending you sit tight and wait for a more compelling opportunity.

That being said, I will monitor the company’s progress in the aftermarket. If Athenahealth becomes profitable and demonstrates consistent revenue growth, we’ll reconsider a purchase as investors will be rewarded once the powers of leverage kick in. At this point, though, that’s too big an “if” to put our capital at risk.

** IPOs We’re Passing On… And Why

ZARS Pharma (ZARS): A developer of topically administered drugs for pain management. Unprofitable. Revenue stream is too unpredictable, as two FDA-approved drugs (Synera and Pliaglis) are not yet on the market. And no established markets exist. In the end, no revenue (and in turn, earnings) visibility makes this IPO too risky.

**IPO Pipeline Report

Current Stats: 183 companies with IPO plans filed w/ SEC.

Next Week: 4 IPOs scheduled. Front-runners are Babcock & Brown and Duff & Phelps.

Deals of Interest Further Out: China Digital TV, MedAssets, MSCI and 3Par.

**Portfolio Update

VMware (NYSE: VMW): It was a formality, but nonetheless encouraging. In an SEC filing Monday, VMware confirmed its second quarter results. Recall right before the IPO, management provided preliminary results.

As we already knew, business is booming. Revenues increased 90% and earnings more than doubled. Sit tight here. And remember, this is a long-term play, so keep accumulating on any dips.

**Trader’s Edge

You’ll hear me talk about discipline and patience a lot when it comes to IPO investing. And this week is a prime example of when it can be difficult to adhere to both. And if other investors bid up Athenahealth, despite its shortcomings, such restraint will become more difficult to accept.

Even if that happens, just know this – it’s well documented that companies that are already profitable when they go public perform much better (on average) than their unprofitable counterparts.

I don’t know about you, but I always prefer to invest when the odds are heavily in my favor. And rest assured that with 183 IPOs in the pipeline, there will be plenty of such opportunities in the months ahead.

(Remember, if you have any questions, comments or successes you would like to share, feel free to drop us a line at editor@oxfordclub.com. We’ll do our best to address each one.)

Good investing,

Louis Basenese

Stock
Rec
Date
Rec
Price
Current Price
Comments

VMware (NYSE: VMW)
08/13/2007
$50.75
$74.00
Buy. Sell stop is $60.

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