DigitalGlobe IPO Gets Solid Liftoff

Thursday May 14, 2009, 5:59 pm EDT

By Amy Reeves, Investors Business Daily

The offering price itself was higher than the expected range of $16 to $18, continuing this year's trend of rare but well-subscribed IPOs. All five of the stocks that have gone public this year are trading at or above their offering prices.

Technology firms are playing a big part in that trend. DigitalGlobe's IPO follows the debuts of online gaming firm Changyou.com (NasdaqGS:CYOU - News) and language software maker Rosetta Stone (NYSE:RST - News) last month. And two other tech-related companies are on deck for next week: enterprise software firm SolarWinds and online reservation company OpenTable.

"Traditionally, tech has been the lifeblood of the IPO market," said analyst Paul Bard of Renaissance Capital. "We're seeing companies that have solid fundamental stories."

DigitalGlobe seems to be one of those. It operates two satellites that take detailed images of the earth for the military and for commercial applications like Google (NasdaqGS:GOOG - News) Maps.

The launch of DigitalGlobe's new satellite, WorldView-1, caused sales to spike 81% last year to $275 million. Its operating profit margin is running at 29%, while free cash flow totaled $10.5 million in the first quarter.

Those metrics all compare favorably to DigitalGlobe's lone direct competitor, GeoEye (NasdaqGM:GEOY - News). GeoEye, which launched its second satellite just last summer, is smaller than DigitalGlobe. It also has lower margins and negative cash flow because it uses more expensive ways of collecting images, such as manned aerial imaging.

While GeoEye's shares have been doing well with a relative strength rating of 89 by IBD's metrics, a recent 13% one-day drop in its share price illustrates the hazards of the business. On Monday it reported first-quarter results that topped analysts' views, but said a camera on one of its satellites was malfunctioning.

After partially recovering, the stock lost another 4% Thursday, closing at 23.63.

DigitalGlobe is no stranger to malfunctions. The first two satellites it launched failed to reach orbit. Though the next two proved successful, that history could give investors reasonable doubt about its planned launch of WorldView-2 later this year.

"Any slip in the satellite's production schedule could mean the loss of a launch slot, a delay of several months in getting to orbit, and shareholders' wrath," wrote Morningstar analyst Mike Ford-Taggart in a research report.

On the upside, the launch could bring another spike in business. Ford-Taggart projects that the recession will keep sales flat this year, but next year might be a different story.

"It's going to be mid-year 2009 pretty soon so people are going to be looking into 2010 for companies whose top line revenue has a chance of popping," Francis Gaskins, president of IPO Desktop, wrote in an e-mail.

Both DigitalGlobe and GeoEye have room to grow, thanks to rising demand for their services, Bard says. Last month, National Intelligence Director Dennis Blair said the agency will outsource more of its digital mapping to private vendors to save money and fill gaps in its archives.

DigitalGlobe has another risk in common with every other IPO so far this year: Very few of the proceeds are actually going into the company. Insiders have walked away with most of the funds raised by the offerings.

Insider selling often signals a lack of confidence in the company's future. But Sahir Sumeli, vice-chairman of energy and clean technology for law firm Mintz Levin, says this year's trend has more to do with how the deals are structured.

"If you look at the deals, there have been two spin-offs, and the rest are private-equity backed," he said. "They didn't buy a company with no revenues and slowly grow it up. These are businesses that throw off a lot of cash."