Castlight Health Stock Jumps 149 Percent on IPO

2014-02-03_22-15-50

Castlight Health held its market debut Friday and, despite the pre-market scrutiny over consistently poor earnings, the CSLT ticker symbol soared 149 percent above its offer price by the close of trading. The stock was priced at $16 per share by underwriters Goldman Sachs and Morgan Stanley, but Friday morning when trading started the shares opened at $37.50. Castlight sold 11.1 million Class B stocks and raised $177 million in the offering.

Generally, soaring stock prices are not cause for celebration for companies going through an IPO because it means that the offer price on the stock was set too low. In this case, had Castlight offered its stock at $39.80 per share, which is where its stock ended the first day of trading, the company would have raised $441 million. By selling at $16 per share, Castlight unintentionally left $264 million on the table. To give that some perspective, $264 million is more money than Castlight has earned in both revenue and VC investment rounds in all the years since its launch.

The two-weeks leading up to Castlight’s IPO showed signs that both the company, and its underwriters, were struggling to come up with an appropriate initial stock price. Two weeks ago, on May 3, Castlight announced that its opening price would be $9 – $11 per share. One week later, it increased this range to $13 – $15 per share, and then, just prior to the IPO, it upped the price once more to $16. In total, Castlight raised the price 60 percent in the two weeks leading up to its offering.

Some are calling the Castlight IPO further proof of a bubble in the tech IPO space because valuations are coming back higher than they should. One frequently referenced example of this is the gaming company behind Candy Crush Saga which is seeking a $7.6 billion valuation going into its IPO.  The company owes almost all of its revenue stream to a single game that many analysts doubt will carry the company for many more years or substantiates a $7.6 billion value. However, Candy Crush Saga generated $1.8 billion in revenue in 2013, so the valuation it is seeking is only 4.2 times its 2013 revenue, modest compared to Castlight’s.

In Castlight’s case, its 2013 revenue was $13 million and it was seeking a valuation 107 times that, at $1.4 billion. Price to revenue ratio’s that high have not been seen since the 2000’s era dot-com bubble. When Castlight’s stock hit the open market, the surging stock price drove the overall valuation higher, to $3 billion or 230 times its previous year’s revenue.  There is nothing to substantiate this value in Castlight’s mediocre past performances. However, looking to the future, the Castlight story is a bit brighter. The company is starting 2014 with $108 million in booked business sitting in its backlog. If all of it converts, that would be almost a tenfold increase in revenue between 2013 and 2014.


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