Every IPO is not a pot of gold.

investmenttool.com Cover Story

If you are upset that you don’t get access to those hot IPO offerings Friday should make you feel a little bit better. E-machines decided to offer stock to the public on Friday. The results were less than expected.

There is a lot of hype surrounding IPO stock offering. People seem to think that companies like Red Hat which jumped nearly 100% on the first day of trading and eventually reached six times its offer price is the only possible outcome. They clamor for access to these stock offerings thinking that its easy money.

So what would have happened if you had been lucky enough to the E-machines IPO. First, you were not lucky. The stock finished the day down ¾ of a point. This represents a loss of 8.3 percent on your investment.

Some folks really like taking risks so they just buy the new company on the open market the first day of trading. If you did that with Palm Computing you got a nasty shock. The stock which was offered around $50 a share peaked at $165 on day one. It then began to drop sharply, finishing at $57 on Fridays trading.

So now that we have established that IPO stock offering are not a license to print money we need to figure out what they are. Quite simply they are opportunities to buy individual companies. The reasons they rise and fall have a lot to do with those companies.

Back to E-machines. E-machines build computers at very low prices. They try and make up the money by letting advertisers put messages on the screens of these machines when they are connected to the internet. They actually made a little money in the forth quarter of 1999 but project losses for the year 2000.

The thing issue that drove investors away from E-machines was very important. They are trying to enter a business dominated by the likes of Dell Computer, IBM, Hewlett Packard, Compaq, and Gateway 2000. These are a tough bunch of competitors. Especially dangerous is Dell because they produce better quality machines at a lower cost to Dell than E-machines. Dell has the marketing muscle of Dell.com to sell machines at a lower cost and does not have to rely on retailers.

Some investors wonder about the quality of E-machines. I recently spoke to the manager of a Chicago area computer store. He indicated to me that 1 in 5 E-machines fail the store setup test and have to be shipped back to the manufacturer. In addition, he said that of the four that make it out the front door of the store, one comes back in the first 30 days, dead on arrival. That is a very high failure rate. Dell and IBM both have a failure rate of under 7% according to widely accepted sources on quality.

Then there is the issue of litigation. E-machines decided to build a machine that looked a lot like the Apple imac. They have been sued by Compaq computer for copyright infringement. These facts were readily available in the media and on the Internet. I personally would not be caught dead holding this stock.

Palm computing was another story. It’s stock got inflated on the first day by hype. Lots of folks who could not get shares allocated from the IPO bid up the price on the first day. Many of those same folks have now lost nearly two thirds of their investments.

Even kind of the IPO hill Red Hat has fallen from a peak of $151 to a close of $60 on Friday. That is still above the split adjusted IPO price of $20 but not the pot of gold at the end of the rainbow. In general, the market for new Linux companies has cooled off a great deal in the past two months or so.

The moral of this story is be careful. If a company looks like its story is too good to be true, it probably isn’t true.

Shmuel Protter
investmenttool.com

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