Bill Miller not alone in love for ugly tech bets

Of all the things that have nothing to do with China or oil prices, technology IPOs are near the top of the list. Yet the stock market's shocks since August have sent the prices of many IPOs tumbling, wiping out their early gains and pushing many below even their offering prices — raising the question of whether they are worth a second look.

The right bottom-fishing can produce big profits: History says nearly all major long-term IPO winners trade down at least briefly. Of the major first-generation Internet moonshots, onlyeBay (EBAY) and Google (GOOGL) never got below their IPO prices. Even Facebook (FB) did, amid a burst of skepticism about its ability to "get" mobile advertising. So for investors who choose wisely, the IPO junk pile can be a profitable place to hunt value.

The question is whether 2015 tech offerings, like Fitbit (FIT) or online storage service Box, (BOX) can get back to peaks they reached in a hotter market.

"If the business model is working the way they said it would [before the IPO], this can be an interesting time to get in,'' said Lise Buyer, a Silicon Valley IPO consultant and former Credit Suisse (Grey Market: CBSQF) analyst. "The question is, did the business crack or did the market crack?"

Last year was the slowest year for the tech-IPO market since 2010, with only 24 deals getting done, according to Renaissance Capital, a Greenwich, Connecticut, manager of two IPO-focused exchange-traded funds. Even with the smaller numbers, more than a dozen deals either faltered as investors were unimpressed with companies' follow-up to the IPO or moved below offering prices as the broader market wobbled.

In January, there were no new IPOs brought to market for the first time in four years. Two biotech companies, Chinese cancer-therapy developer BeiGene (BGNE) and gene-editing start-up Editas Medicine, went public Feb. 3.

But a number of 2015 companies may meet a Buyer's test, pros say. Payment-processor Square (SQ) and fitness-band maker Fitbit are among the fallen tech darlings that are now intriguing to experts who acknowledge the companies have made execution errors.

Renaissance Capital principal Kathleen Smith cited other prospects, including project-management software-as-a-service company Atlassian and online retail software provider Shopify. Outside of technology, she's still high on pet-food maker Blue Buffalo Pet Products (BUFF) (dogs haven't developed an aversion to biscuits since Blue Buffalo's July IPO) and credit-reporting firm TransUnion (TRU).

All these companies have been hit by the market but haven't made major mistakes, she said. And she argues that while biotech companies are again testing the IPO waters — and this week's two deals have proved to be successful, so far — biotech is too scientifically dense for most retail investors, while also facing tough business challenges if their drugs work.

"Even if you know the science, you don't know the business model,'' Smith said.

Atlassian, which is solidly profitable and was growing at a 50 percent annual rate at the time of its IPO, has given up nearly all of the 32 percent gain over its $21-a-share December IPO price, and is down 13 percent from its first day of trading open price.

After the close on Thursday, Atlassian's reported a 44.7 percent increase in quarterly revenue, and net income edged up to $5.1 million from $5.0 million a year earlier, according to Reuters.

Atlassian's 3-cent-per-share earnings was 1 cent short of the consensus Wall Street estimate, but revenue rose to $109.7 million from $75.8 million and was above the Street estimate of $102.7 million. The company made $98.2 million in operating cash flow in its last fiscal year, on revenue of $319.5 million.

The company's shares opened lower by as much 10 percent in trading on Friday morning, and at one point fell below the $21 IPO price.

"That's a good one you might want to look at," Smith said.

Across the country, Menlo Park, California-based fund manager Mike Moe also praises Atlassian and is thinking about more aggressive, higher-risk bets on companies like Square and Fitbit. He also likes Match Group, owner of the Tinder dating app and Match.com, which delivered disappointing fourth-quarter earnings this week that sparked a sell-off. He's more skeptical of Box, thinking it will get supplanted by rival Dropbox, in which Moe's GSV Capital is an investor.

The most obvious point he makes is that nothing has happened to people's appetite for dating since November that hurts Match (whose paying user base is growing despite a raft of free dating sites). Shopify (:NULL)'s proposition that small- and midsized businesses have to adopt mobile and other online platforms is likewise intact, and it beat analysts' bottom-line forecasts in each of its two quarters as a public company. At about $23, its shares are above the $17 IPO price but below the first-week high of $29.65.

How to look at Square's stock depends in part on how investors feel about Jack Dorsey, CEO of both the small-business-driven payment-processing company and of microblogging service Twitter (TWTR), Buyer said. At just under $9, shares are right about the offering price but have given back their first-day pop to $13.07. But Wall Street isn't yet buying in to Square's promises of 20 percent to 25 percent growth and fat profit margins.

"Reaching more mature [profit] margins and a higher level of future profitability is going to be a multiyear journey,'' said Deutsche Bank analyst Bryan Keane, who rates Square a hold. "The company has targeted 35 percent to 40 percent adjusted profit margins over the long term, and it remains to be seen if they can meet those margin targets.''

But Dorsey has backers. Moe is cautiously optimistic about Square, saying "it's speculative, but it could be huge.'' And legendary Legg Mason fund manager Bill Miller said Wednesday on CNBC that 2013 IPO Twitter is a great deal at $16 a share, even though it's down from more than $70 amid strategy changes following the departure of ex-CEO Dick Costolo and the company's struggle to roll out new advertising products. It now trades at less than 30 times 2016 earnings estimates, and it's expected to boost annual profits by about 60 percent a year, making it cheap by the standard ratios growth investors use, Moe said.

"Twitter (TWTR) is … by far the best aggregator of important information that we have," Miller said on CNBC. "Consider that Facebook has five times the users Twitter has, but Facebook's got 30 times the market cap of Twitter. … There is an enormous opportunity there."

The busted deal with the most passionate defenders on Wall Street appears to be Fitbit, whose stock went above $50 after its $20-a-share IPO last June and has slumped all the way back to $16.71.

Most analysts still like the deal, though, arguing that the company's fitness trackers are the beginning of a suite of products for active lifestyles. The downside case is that the company's new Blaze tracker didn't have enough new features to impress at the Consumer Electronics Show in January, Buyer said, spawning fears that the Fitbit craze might flame out.

Even bullish analysts, like Ross Sandler of Deutsche Bank, acknowledge that comparisons to once high-flying camera company GoPro (GPRO) are creeping into discussions about Fitbit. GoPro hit a new 52-week low this week after a 9 percent decline on a weak earnings outlook.

"We see the Blaze as the tip of the iceberg for Fitbit in 2016," Barclays analyst Matthew McClintock said. "We estimate that the company will triple its R&D budget in FY15 from FY14, and given that most features of the Blaze are not radically new, we expect most of this budget to be reflected more in products launched later in the year."

— By Tim Mullaney, special to CNBC.com

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