In just days, California-based Aerohive Networks will begin trading publicly under the ticker symbol NYSE:HIVE. The company sells cloud-enabled wireless services to businesses and schools.
The IPO will be relatively small as the company is only seeking to raise as much as $95 million when it lists its shares on the NYSE beginning Friday. But small isn’t necessarily bad. Here’s the buzz on the Aerohive IPO.
Aerohive competes in a tough market. By providing enterprise wireless hotspots to companies and schools, Aerohive competes with already successful companies like Cisco (NASDAQ:CSCO) and Aruba Networks (NASDAQ:ARUN).
The main difference, which appears to be Aerohive’s competitive advantage, is that Aerohive focuses on wi-fi solutions geared towards today’s reality of cloud computing and a large number of mobile devices connecting to the same network.
Aerohive isn’t yet profitable, so investors could consider that a black mark against the IPO. However its revenue growth has been nothing short of impressive.
The company earned revenues of $15.6 million in 2010, $34 million in 2011, $71.2 million in 2012 and $107 million in 2013.
While the revenue growth is clearly there, the company reported losses of $33.2 million on its $107 million in revenue in 2013.
I have two major reservations about this IPO.
The first begins when you look at the list of investors. Five major venture capital firms currently hold 74.4% of the company. Venture capital firms make their money by continually investing in “the next big thing” with the expectation that most investments will be worthless but a select few will prove hugely profitable.
For venture capital firms, the IPO of a company in which they have invested is the end game, the way the venture capital firm realizes its profits and moves on to the next round of startups.
Considering Aerohive company is 75% owned by these venture capital firms, there could be a lot of profit taking after the IPO. And profit taking means selling. A lot of selling means it’ll be tough to find enough buyers to keep the stock price afloat.
My next major concern with this IPO has to do with Aerohive’s business itself.
Aerohive competes against companies like Cisco and Aruba Networks to provide enterprise-level wireless hotspots and connectivity. The company bills itself as better able to cater to the smaller clients (like schools) and that its services are better suited for cloud-computing and mobile device needs.
I find this assertion to be a bit ridiculous.
If Exxon Mobil (NYSE:XOM) had a competitive advantage because its gas stations offered TVs in the gas pumps to help people stay connected in this modern world, its competitors would simply install TVs in the gas pumps.
If a company’s competitive advantage is something that its competitors could easily adopt, it is hardly going to remain an advantage for long.
What’s more, Aruba Networks is a $2.16 billion company and Cisco is a $112 billion company. After its IPO, Aerohive will likely be valued around $500 million.
Even if Aerohive has a major head start in the race to offer wireless services catering to cloud-computing and mobile connectivity, surely its much larger competitors are in a position to outspend Aerohive and build a much more comprehensive solution.
As much as Aerohive’s business looks different from its competitors, Aerohive, Cisco and Aruba Networks are all ultimately selling the same thing: wireless internet access.
I’m inclined to believe that its larger competitors can invest in better services and that Aerohive will ultimately struggle.
But the real buzz on the Aerohive IPO is the 75% of the company owned by venture capital firms. That tells me that there will be a lot of selling after this IPO and that I’m best served by staying clear of HIVE.
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