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Designer Stocks: Reeling In Razorfish's IPO Vs. Peers

The upcoming IPO of Web uber-design firm Razorfish may not have as much room to run as many Net stocks have lately if we compare it to already-public stablemates USWeb/CKS (NASDAQ:USWB) and Modem Media (NASDAQ:MMPT). The upstart company wants to sell 3 million shares at $11 or so through First Boston, valuing the company at about $270 million.

The market value alone means zero. On a very basic level the three flavors of Web design/marketing outfits trade at my estimated 6x 1999 revenue, which starts to indicate some price inelasticity to me.

To get there I'm using Razorfish's pro forma revenue for 1998 which was better than its $13.8 actual reported results. That favors Razorfish from a multiple viewpoint since the lower actual results vault the multiple to about 20x 1998.

On a first-day of trading basis if the revenue multiple dominates the action (which it may not if investors simply buy Razorfish because it's the new kid on the block) then Razorfish at a target $11 per share could be valued in line with its peers here. The table shows one scenario:

  Razorfish USWeb/CKS Modem Media
IPO target share price $ 11.00 na na
Share price April 26 na $ 28.06 $ 36.13
Shares outstanding (millions) 24.5 74.4 11.1
Market cap/value (millions) $ 270 $ 2,088 $ 400
       
1998 revenue* (millions) $ 31 $ 229 $ 43
Estimated 1999 revenue (millions) $ 45 $ 345 $ 64
       
Revenue multiple      
on 1998 8.7 9.1 9.4
on 1999 6.0 6.1 6.3
) 1999 internet.com

Risks: Delving inside Razorfish we discover that a handful of clients made up for most of its revenue, not a sign I enjoy seeing on first glance. Charles Schwab accounted for approximately 27.1% of revenues in 1998 while just four clients made up 63.5% of 1997 revenue.

Additionally, Razorfish has been on the hunting path and acquired Swedish Web firm Spray, which will own 33% pro forma the IPO. Ad outfit Omnicom (through its Communicade subsidiary) owns a third also. The acquisitions boost Razorfish's top line but there's always that period when new buys are being absorbed that may slow down the effort at being a one-unit humming machine.

While HTML may be lingua franca for developers managing a diverse set of different language and cultures across its international offices also poses some risks. Razorfish has offices in London, England; Stockholm, Sweden; Oslo, Norway; Helsinki, Finland; and Hamburg, Germany.

Pros: Despite its limited client base some of the names are big ones: booming eBay, deep-pocketed Time Warner, the Smithsonian, and Ericsson (I already mentioned Schwab).

A strong positive--Razorfish revenue grew more than 280% in 1998 vs. 1997 as the consolidation factored in.

My 1999 estimates may be over conservative in revenue for the firm also. If it can hyper deliver $60 million revenue then the multiple comes down to 4.5x.

Overall, however, despite the frenzy that could be exhibited for Razorfish on IPO, I think market leader USWeb/CKS, with its hefty revenue base and footprint as integrated design/strategy/marketing, may look more attractive at these relative valuation levels. Usually market leaders enjoy more of a premium.


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