IPOs return: Facebook and Twitter next?

Three companies went public this week, making this the most active one for new offerings in more than a year. Is the IPO market finally back on track?

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By Paul R. La Monica, CNNMoney.com editor at large

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NEW YORK (CNNMoney.com) -- If you're looking for signs that the market and economy are slowly returning to normal, it is somewhat encouraging that demand for new stocks is finally perking up again.

Medidata Solutions, a software company for big drug companies, went public Thursday and its stock was up more than 20% in midday trading.

Medidata's initial public offering comes one day after two Chinese firms, chemical manufacturer Chemspec International (CPC) and water treatment equipment maker Duoyuan Global Water (DGW), also had successful debuts as public companies.

As amazing as it may sound, these three offerings make this week the busiest one for IPOs since April 2008.

With that in mind, could the IPO market continue to show signs of life? And if so, will other hot private companies, most notably social networking darlings Facebook and Twitter, soon file for offerings of their own?

That might be asking for too much.

While Facebook has effectively stolen all the thunder from MySpace, and Twitter is earning raves due to its use as a means for social protest in Iran, both companies still haven't proven how they intend to transform from merely being cool to also being profitable.

And even though IPOs do appear to be making a comeback, investors still seem to be favoring substance over style.

It's helping that companies and underwriters appear to be doing a good job of gauging demand for the new stock. So stocks have tended to do well on their first day but not skyrocket to absurd heights the way low priced dot-com IPOs did back in the late 1990s.

"For the most part, everything's that come on to the market since November has worked. There haven't been any disasters or disappointments. Deals are being priced at more reasonable valuations," said Ben Holmes, publisher of MorningNotes.com, a Boulder, Colo.-based independent research firm focusing on IPOs and secondary issues.

Talkback: Would you invest in Facebook or Twitter if they go public? Are they worth the hype?Leave your comments at the bottom of this story.

But after this week, there's not much for investors to choose from as the pipeline of prospective IPOs remains mostly empty. There is one company on tap to go public next week, tech service firm LogMeIn. That's it.

Part of that is a typical slump in activity during the summer. The pipeline could start to fill up later this year as long as the recent crop of IPOs continues to fare well.

"As long as demand and performance stay healthy, the window for IPOs will remain open," said Eric Guja, a research analyst with Renaissance Capital, a Greenwich, Conn.-based investment firm specializing in IPOs "But the one thing we've yet to see is a real pickup in filing activity."

That said, there actually have been several successful IPOs so far this year. And some of them have even been ones with significant investments from venture capitalists.

The knock on some venture-backed IPOs in the past is that VCs may have rushed some companies onto the markets to take advantage of momentum and investor enthusiasm.

As a result, some VC-backed companies debuted to dizzying one-day returns and wound up quickly fizzling once it became apparent that the companies didn't have the revenue and profits to justify the hype.

Quality makes a comeback

But last month, enterprise software firm SolarWinds (SWI), a profitable company that had investments from VC firms Bain Capital, Insight Ventures and Austin Ventures, went public. It was the first venture-backed IPO since last August.

The company priced its offering above its initial range and debuted at $12.50. The stock is up nearly 10% since it began trading.

SolarWinds' debut was followed a day later by another venture-backed IPO: online restaurant reservation management firm OpenTable (OPEN).

Benchmark Capital, a leading investor in eBay, and Impact Venture Partners are two of the prominent VCs involved in the OpenTable deal. Barry Diller's IAC/InterActive is also an investor.

Shares of OpenTable, which recorded a slight net loss last year but has enjoyed healthy revenue increases and posted decent operating profits, are up more than 40% since they hit the market.

Medidata (MDSO) is also venture-backed. And like OpenTable and SolarWinds, the company has an actual business that allows it to generate steady revenue. Medidata's biggest customers are the heavyweights in pharma and biotech, such as Johnson & Johnson and Amgen.

With that in mind, the timing might still not be right for Facebook or Twitter to test the public waters.

"Higher profile deals like a Facebook or Twitter could see a lot of demand. But they may be more speculative as far as their business models go," said Guja.

When you look at some of the other successful IPOs of this year (without venture backing) it's clear that investors are looking for firms that are either: A. already generating earnings or B. heavily exposed to the growth juggernaut that is China.

Shares of language software developer Rosetta Stone (RST), which posted annual profits last year and in 2007, are up nearly 40% since the company's IPO in April. And shares of Chinese online gaming firm Changyou (CYOU), which is also profitable, have more than doubled since it went public in April.

Holmes said one company that has already filed for an offering that he thinks could have a chance of doing well is A123 Battery Systems, a company developing lithium-ion batteries for cars. But he's not predicting a Facebook or Twitter IPO anytime soon.

"We had a total absence of new offerings for a long time and we're just getting back to the low end of normal issuance," he said. "The IPO market isn't healthy enough yet to bring out something epic."

Talkback: Would you invest in Facebook or Twitter if they go public? Are they worth the hype? To top of page

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