After stumbling in its debut, Cardlytics (CDLX) flew up 33% in two days, making it the 4th-best IPO of 2018. It initially priced at the low end, broke issue, and finished with a first-day gain of just 2.8% on Friday. That changed this week. It has been the IPO Market's top gainer for two days straight, surging 16% on Monday, and another 14% on Tuesday.
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Backed by Canaan Partners, the marketing software provider raised $70 million at an IPO market cap of $267 million - roughly the same amount it has raised in funding. The Atlanta, GA-based company became the year's first IPO from a US tech company. It is just one data point, but investors' appetite for software and growth is an encouraging sign for the tech sector after last week's volatility shook the IPO market.
Insights from Cardlytics' IPO Pro profile
IPO Pro is built for IPO analysis, and we invented a shortcut called the MUSCLE Method (free pdf download). It stands for IPO Market, Underwriter, Strength of Industry, Core Fundamentals, Legal Docs, and Early Trading.
Looking at the IPO Pro Cardlytics profile, notice that our IPO Market indicator is "cautious." This proprietary signal sets the tone for IPO investing, and we clearly saw that caution with Cardlytics' +3% debut on Friday.
Next, scroll down on the profile for the recent track record of its lead underwriter. BofA Merrill Lynch is one of the IPO market's most active banks. The underwriter has led 16 IPOs in the past year, averaging a gain of 26% in the first three months. IPO Pro's underwriter screen shows the complete breakdown for every investment bank.
Technology IPOs are working. The tech sector's average return is 25% from IPO over the last 12 months.
Next, evaluate core fundamentals like growth, profitability, leverage and valuation. Cardlytics had strong sales growth of 45% in the last fiscal year (19% YTD). The company was unprofitable on EBITDA, not unusual for tech, but not ideal either. It doesn't look over-levered, though its $56 million in debt is worth keeping an eye on. At IPO, Cardlytics was valued at 1.8x trailing sales, and now it's at about 2.6x. That may still look relatively cheap for a software company, but keep in mind its low 38% gross margin.
Moving onto its legal documents: Nothing replaces an analysis of the IPO prospectus. We recommend you focus on key sections like Risk Factors and Management's Discussion and Analysis
Finally, Cardlytics has had strong early trading. Investors initially pushed back on valuation, before turning bullish on Monday as markets stabilized.
We can't tell you where it will go from here, but its recent jump should give the tech IPO hopefuls a sigh of relief.
