Two Views of the Alien IPO

Was it “market conditions” or “poor fundamentals” that caused the maker of UHF EPC systems to postpone its IPO.
Published: August 3, 2006

A couple of readers jumped on me for suggesting that market conditions—more specifically, Wall Street’s view that radio frequency technology is not yet taking off in the supply chain—were responsible for Alien Technology’s decision to postpone its initial public offering (see Alien Technology Postpones IPO).

The gist of most of the correspondence was that Alien has “poor fundamentals” and that’s why Wall Street wasn’t enthusiastic about the IPO. Poor fundamentals, for those who don’t speak financialese, generally means that the company’s finances are not strong. In Alien’s case, most people have focused on the fact that it has negative gross margins, meaning it sells products for less than it costs to make them.

Selling products at a loss can be a strategy to gain market share and, in the case of a new technology, encourage adoption. In the long term, of course, it leads to bankruptcy. While I agree that Alien’s IPO would likely have gone ahead if the company had 30 percent gross margins, I think it’s simplistic to say that the IPO was delayed because of poor fundamentals.

Think back a few years. There was a time when dot-coms with negative gross margins not only held successful IPOs, but were bid up to dizzying heights by some very smart investors. Anyone remember Jeff Bezos and a company called Amazon was founded in 1994 and didn’t make a dime in profit until 2004. The company’s shares were once the envy of those old brick-and-mortar companies.

I know what you’re thinking: It was a different time, and investors had a different attitude. The point is that investors believed that the Internet was a new technology that offered vast new opportunities, and those that dominated the Net would be the big winners. They believed that it made sense for companies to operate at a loss in order to get big fast and capitalize on the long-term opportunity.

Investors look at fundamentals in light of bigger trends. Investors will bet on a company with less than stellar fundamentals if they believe that the company will benefit substantially from widespread adoption of a new technology. Wall Street clearly didn’t feel that was the case with Alien and RFID. But as RFID adoption gathers momentum, that view might shift.