The MUSCLE Method _®

Take me through an example!

By now you’ve probably read the previous articles about the MUSCLE Method of IPO analysis. Good for you! Now you know way more about IPO investing than most of the public. Let’s apply the MUSCLE Method to a profile on IPO Pro so you can see how it all comes together.

This is Twilio’s profile.

You can see we’ve highlighted every part of the MUSCLE method on the profile for you. These locations are exactly the same, profile to profile. So let’s start with M.

M - The IPO market is positive right now. This means the market is open to new deals and it is generally a good time to invest in the IPO market.

U - The underwriter is Goldman Sachs, one of the big names you like to see. They’ve led 19 IPOs in the last 12 months with a solid average return of 18% at the 3-month mark.

S - Industry strength is clearly positive. Tech IPOs have returned 34% in the past year. The industry is in high demand.

C - Core fundamentals are good overall. Growth and leverage are strong: we like to see growth over 15% and leverage less than 1x EBITDA. Profitability is weak, as is the case with many tech deals.

After working through the first steps of the MUSCLE Method, this is where you should decide if you want to invest time into analyzing the prospectus. Despite the weak profitability, I’d like to learn more about this company, so I’ll move on to the legal docs.

L - Clicking through to the prospectus for the full analysis, I can see that the market is relatively new, and barriers to entry seem low. Competition is intense, but revenue has grown fast and they are the leader in the Cloud Communications Platform category.

At this point I have decided I want to invest in this company. Let’s look at early trading.

E - Twilio priced above the range of $12-$14 at $15 a share. Good indication for strong demand. Twilio popped 92% on its first day and continued to soar, reaching a gain of 360% three months after the IPO. A solid return for any investor! At that point, the valuation was stretched (be careful buying into a 360% gain) and the stock spent close to a year near its first-day close before once again taking off.

The MUSCLE Method won’t give you a crystal ball for buying IPOs. But when you do your research, you will be better informed than most of the investing public, and better able to make investing decisions confidently.

That’s what the MUSCLE Method is about, analyzing IPOs so you can invest confidently.