LoudCloud IPO: A Litmus Test For ASPs' Future

The ASP market, and the entire technology sector, held its breath this morning as Loudcloud launched its initial public offering. Analysts, traders and the business press have anxiously anticipated the first important tech IPO of the year. Many are looking to the software infrastructure services provider as a litmus test for the future viability of ASP-related technology companies.

Founded in part by Netscape co-founder Marc Andreessen, the company's stock was expected to price between $8 and $10 per share, but opened at just $6. Despite the low opening price, many analysts are sweet on the stocks' performance--especially amidst the turbulence of today's markets. Both the Dow and Nasdaq have posted three-figure losses all day, but despite the hostile environment, Loudcloud (LDCL) has held steady.

A Wall Street analyst VARBusiness spoke to today points out that anything short of negative movement is a positive sign for the stock given the current climate. "It helps that Compaq was able to buy 5,000 shares this morning at a discounted price, and of course, the underwriters are capable of holding up the stock for a certain period of time as well," he explains. According to the analyst, underwriters have not been called upon to stem a negative tide just yet.

Loudcloud offers an "Instant ASP" service, which includes the "application functionality an ASP needs--configuration, management, billing, customer monitoring and log management--in order to offer a software application as an Internet-based service," Loudcloud said. The company is also concentrating on a larger market by offering businesses Internet infrastructure services necessary to provision, deploy, maintain and scale Internet operations.

Founded in 1999, the company's strongest characteristic is its dozens of customers, including Ford Motor Co. and News Corp. Already, the company has more than 550 employees. As of Oct. 31, it had losses of $180 million, including about $124 million in expenses related to stock options. Its IPO filing also warned of incurring future operating losses: "To achieve operating profitability, we will need to increase our customer base and revenue and decrease our costs per customer. We may not be able to increase our revenue or increase our operating efficiencies in this manner. If our revenue grows more slowly than we anticipate, if we do not increase utilization of our leased third-party data center space and technology infrastructure or if our operating or capital expenses increase more than we expect, our operating results will suffer."

"Even though Loudcloud's forward-looking statements promise nothing but operating losses, the company has an impressive customer base focused on traditional enterprise companies," the Wall Street analyst says. "People want to buy into this in hopes of the entire market moving forward over the long term. Just be sure you can afford to hold over the next few years," he advises.

IPOs are an extinct species this year, which is partly due to the overzealous foray into the public markets over the last two years. It looks like the pendulum has swung, though, and scores of IPOs are backlogged. Only the strongest of those will be able to come out over the next six months, but if Loudcloud can continue to hold up to today's pressure the overall climate for ASP companies may be clearing.