ReachLocal IPO (Final Update)

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Silver Lining

ReachLocal was lucky enough to choose for their opening day of trading a day when the Nasdaq tanked by over 4%. Despite an incredibly tough market and actually opening below their issue price of $13 per share, the stock ultimately closed at $14.98 which is up more than 15%. Good for ReachLocal! That means their advisers at JP Morgan and BAML came up with the right price. If the stock had skyrocketed, then management would feel like they left money on the table by not pricing it higher. Had it closed down or flat then you would question why they didn’t price it a little lower as long as they were going to price below the filing range anyway. As it stands, the stock did exactly what you’d like a stock to do in its first day of trading. Based on my assumptions from my first post, that has them trading just above 1.0x 2010E Revenue (if you assume they grow at their current 50% clip). So despite having to price below their filing range, they raised about $40 million if you assume total fees for the offering in the 7% range.

What’s Next?

So ReachLocal will likely have about $80 million in dry powder (cash on the balance sheet) once the dust settles. What will they do with $80 million? My guess is that they will continue to invest heavily in sales and marketing, potentially beef up some development, and selectively look at small bolt-on acquisitions. The cash isn’t enough for them to do any large acquisitions, but they now have another currency for transaction in the form of their stock. I wouldn’t guess that they’ll look at any big deals, but I could see them trying to fill out their service offering with some smaller complementary businesses. I look forward to reading the “Initiating Coverage” reports from guys like Imran Khan and the other underwriters’ analysts. I hope they acknowledge the amazing work we’re doing here at OrangeSoda as they discuss the industry landscape.

Parting Shots

Unless there is some major news around ReachLocal and/or their stock, then I say enough about them, let’s talk about us. OrangeSoda is doing incredible work on behalf of our clients, our channel partners, and their clients. So for me it’s more fun to pontificate on what OrangeSoda does than wax lyrical on a competitor. However, ReachLocal’s strong growth, large funding rounds, and now IPO deserve a little air time. It certainly establishes a valuation benchmark within the sector. As such I’d like to see the stock trade closer to Constant Contact multiples. I’ll be surprised if it doesn’t at least work its way up into LivePerson / Art Technology Group range. Finally, of all the risks listed in their prospectus I think the biggest risk for them is really OrangeSoda…FEAR THE FIZZ!!! We take great care of our clients, our partners, and their clients. We deliver the Return on Ad Spend businesses crave.


AJ Wilcox

Great job Trent. You’ve taught me some great things about company evaluations. This does bode well for OrangeSoda!

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