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By Ryan Leggio | 06-20-2011 10:22 AM

Thacker: Demand the Same from IPOs as Any Other Stock

The rising crop of social-technology companies have solid growth prospects, says RS Investments' Allison Thacker, but her team would require the same valuation upside as any other name in their funds.

Ryan Leggio: Hi, I'm Ryan Leggio. I'm a mutual fund analyst at Morningstar, and with me today is Allison Thacker. She's a co-portfolio manager at RS Investments based in San Francisco. Allison and her team run large, mid, and small-cap growth funds.

Allison, thanks so much for being with us today.

Allison Thacker: Thanks for having me.

Leggio: Well, it's perfect that you're in our offices right about now. We've seen the IPO market, especially the social media stocks like Pandora, in the news, and that's right in your wheelhouse being based San Francisco. You get to meet with a lot of these companies, and you've really kind of seen them grow up.

Can you talk a little bit about, if you're seeing opportunities in these companies, which either have launched or are getting ready to launch, and what you think generally about valuations for these stocks?

Thacker: Sure. Well, we're very interested to see the new crop of IPOs coming out. Social media has been something that our team has looked a lot at over the last few years. As you mentioned, having a big presence in the Bay Area can be an advantage, because during the time periods when the companies are actually private, you can go over and meet with them, and to some extent they are often more open with information because they're not regulated when they're private companies.

So, I know we've talked about it before, but "anchor point investing" is a key part of our process, where we're trying to understand where does this company want to go over a three to five-year timeframe and what kind of quantitative metrics do they use to think about where they can take their business. And at lot of the time, private companies think more of that way, so you can get a good read on what they want to do with their business and you can get a feel for how their business is developing before they go public.

So, it's interesting that you mentioned Pandora. That's one of companies that I've met a couple of times around the Bay Area and visited their original offices, and it's very insightful to get to go see them in place. One of the big advantages of their technology, as they say it, is that they analyze a musical track on over 400 characteristics, anywhere from the lyrics to the melody to what type of percussion instruments you hear on the piece, and you may not, as a listener to music, know why you like something, but there is often these little characteristics that are what you like about it, and so when you tell Pandora that you like a certain song or a certain type of jazz, they can find out their music for you, and so that discovery and that DNA of it is very special, and when you go to their offices, you see this huge workstation area where musicians come in and put in a few hours, listening to tracks and categorizing it, and it's really interesting to see it physically at work as opposed to just reading it in a document, and not necessarily understanding the DNA of the company.

Now Pandora is very interesting. You asked about valuations, and I think this one's a real challenge. They are currently not profitable from either a cash flow or EPS perspective, and they likely won't be for several years, and so from a valuation perspective, the investment banks want you to look at a price-to-sales multiple, which has shadows of the last dot-com time period to it. I mean, at least we're not pricing it on users, which is what was happening in 1998 and 1999. But price-to-sales is also a relatively earlier-stage company metric to use, and so we're wary of that, looking at companies solely on price-to-sales. But I think, Pandora has a lot of very interesting things that make us as growth investors intrigued with it. So I ... could tell you about a couple of those.

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