Fervor roils markets as IPO backlog builds

Companies are lining up to go public. Market conditions are favorable. Investor appetite is strong.

But not all the stocks are sure bets.

Following a string of healthy debuts, the pipeline for initial public offerings is bursting. In all, 168 companies are waiting to go public in the United States — the largest backlog since 2000, according to Renaissance Capital, an IPO advisory firm. The group, which includes Dunkin’ Brands, LinkedIn, and Toys R Us, is aiming to raise some $38 billion.

The situation is similar overseas. Glencore, the world’s largest commodities trader, is set to go public with a dual listing in Hong Kong and London. The offering, at roughly $10 billion, is on track to be the largest IPO this year.

“The IPO market is a cycle, it’s bought on hope, held in greed and sold in fear — we’re in the first stage,” said John E. Fitzgibbon Jr., founder of the research firm IPO Scoop.

The pickup in public offerings is natural, given the strength of the broader equity markets. After suffering a setback during the European debt crisis, the Standard & Poor’s 500-stock index is up 28 percent since August. It tracks the improvement in the deal-making environment, with mergers and acquisitions at their highest volume since before the financial crisis.

“There is a connection between the M&A market and going public,” said David J. Goldschmidt, a lawyer at Skadden, Arps, Slate, Meagher & Flom who specializes in capital markets transactions. “Today we have a stronger M&A market and stronger stock market, which gives private companies the option to take a company public or to sell it.”

Investor interest is high, too. In one sign, traffic to Renaissance Capital’s website rose 40 percent in April to 400,000 unique visitors and is on track to reach a record in May. Fitzgibbon of IPO Scoop says the number of subscribers to his site has doubled from last year.

With investors clamoring, corporate issuers are increasingly gaining the upper hand in pricing their stocks. In April, the car rental company Zipcar sold its shares at $18 — a couple of dollars above its expected range. Zipcar currently trades at $25.

About 30 percent of offerings have priced above expectations so far this year, according to Renaissance Capital. In 2010, only 12 percent did the same.

“Last year, we had a market where investors had been in the driver’s seat,” said Kathleen S. Smith, a principal at Renaissance. “Power is shifting, while investors are still driving, it’s a better market for issuers.”

Some companies are being overly ambitious about pricing, as their stocks quickly give up their first-day gains. An index that tracks the performance of companies after their IPO has risen just 2 percent this year. Benchmarks like the S&P 500 and the Russell 3000 index, which measures the performance of the 3,000 largest American companies, have gained 6 percent.

On Thursday, China-based NetQin, a mobile security services company, went public on the New York Stock Exchange, pricing at $11.50 a share, the top of its range. On the first day of trading, the stock fell 19 percent to close at $9.30.

“We’re not really concerned about stock prices today or tomorrow,” said NetQin’s chief financial officer, Suhai Ji. He said he was more focused on the strategic value of going public, including the cachet of a listing on the NYSE and building a platform for partnerships in the United States.

Internet plays are giving analysts the most pause. Amid the rise of Facebook, technology startups are beating a path to the public markets, looking to cash in early while investors still have Silicon Valley fever.

Several social media startups, valued in the multibillion-dollar range, are preparing to go public. The professional social network LinkedIn, which is trading at a $2 billion-plus valuation in the secondary markets, filed for its IPO in January. Groupon, a popular social shopping site, is said to be in talks with bankers as it prepares for an offering later this year.

But the fervor has some analysts worried that valuations are becoming unhinged from fundamentals.

On Wednesday, Renren, often described as the Facebook of China, rose 29 percent on its first day of trading. The social networking site, which lost money last year, is now worth $6.6 billion, some 86 times last year’s revenue.

At that level, the Chinese social networking site is trading at a premium to its much larger and more profitable counterpart in the United States. The privately held Facebook, whose revenue hit $2 billion last year, is trading at 40 times sales on a secondary exchange. The Internet search giant Google trades at six times in the public markets.

“I don’t know about some of these valuations,” said Peter Falvey, a managing director at Morgan Keegan. “People are getting really excited, but it could end badly at some point.”