Tech IPO Market Optimistic

Call it the return of IPO optimism. I can’t find any other reason why Isilon Systems (Nasdaq: ISLN) popped 78% on its first day and is up nearly 100% since its IPO little more than a month ago.

The distributed storage systems company is one of the few private companies losing money that has actually gotten a post-IPO pop in the last year. Isilon lost $15 million on $41.6 million in sales during the first nine months of 2006. Those results are nothing to write home about, until you look at its growth in revenue. Isilon’s sales for the first three quarters of 2006 were up 235% from the same time period in the previous year, when it booked sales of $12.4 million. Maybe that’s what the public market is jazzed about.

Or maybe public market buyers believe prosperity is just around the corner. That’s what the bankers are saying at least. Aaron C. Rakers, an analyst at A.G. Edwards, pegged the company’s target price at $28 per share last December. He writes:

“We believe increased revenue volume and expanding add-on software contributions should support continued margin expansion going forward and eventually lead to profitability in the mid/2H’07 timeframe. Based on our belief that add-on software contributions could increase as overall volume ramps, we believe Isilon could generate a gross margin in the high-50% to 60% range and an operating margin in the mid/high-teens (versus 52.5% and -21.8% in the company’s Sept 06 quarter) – most likely looking into C2008 when the company’s long-term target operating model begins to play out.”

Isilon’s IPO may be the beginning of a resurgence in growth speculation by public investors. That should be a nice end of the year bonus for the VCs who invested $71 million in the company, according to Thomson Financial (publisher of Backers include Sequoia Capital, Atlas Venture, Madrona Venture Group, Eastman Kodak and Focus Ventures.

Isilon follows in the footsteps of Riverbed Technology (Nasdaq: RVRB), which enjoyed a 57% jump on its first day back in September. The stock now trades at more than 200% of its initial offering price. Not too shabby for a company that lost $3 million on sales of $24.6 million during the quarter that ended in September 2006. Riverbed, like Isilon, recorded significant revenue growth. The company boosted sales 250% from the third-quarter 2005 figure of $7 million.

Ryan Hutchinson, of W.R. Hambrect, writes that Riverbed may have hit its profitiability point during its last quarter. He upped his price target to $40 in December. The stock is still bouncing around $30 per share.

What do you think? Has the IPO bar been lowered a little? Are public market investors willing to fund growth?

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