Your Cheat Sheet to the RealD (RLD) IPO

RealD's hipper looking polarized lens 3d glasses.Today, RealD (RLD) will begin trading on the NYSE with the ticker symbol RLD.  RealD, a significant force in the 3d space will proceed with an initial public offering in an attempt to capitalize on the recent surge in 3d box office hits and to position itself for a transition into the consumer electronics market.

Following Avatar, the 3d story was in full buzz with shares of IMAX (NASDAQ: IMAX) flying high; however, more recently, as evidenced by IMAX, the momentum has not held up in equity markets.  Is the IMAX weakness an acknowledgment of the competition that RealD will generate in both theaters and markets?  Or is it a sign that once again, much like in 2000, 3d will prove itself more a fad than a trend (check out this neat little history of 3d from Business Insider)?

Let’s take a look into the RealD IPO to see if we can learn more about what is certain to be a much-hyped event.  The following information comes primarily from the Prospectus filed by RealD with the SEC on June 28, 2010:

What do they do:

  • RealD produces the glasses and projectors that are used to turn a flat screen into a third dimension of viewing pleasure.  In the past, 3d was associated with chintzy cereal box-style glasses with one lens red and the other blue, now they use high tech polarized lenses.  This advancement has made 3d far more lifelike and engrossing for the viewer and is a major component of RealD’s technological edge.
  • The company has entered into licensing deals with with theater chains including AMC, Cinemark (NYSE: CNK) and Regal (NYSE: RGC) to use RealD digital projectors and glasses for 3d movie showings.

Growth Opportunities:

  • RealD is experiencing impressive growth in their on-screen reach, and is hoping to use some of the proceeds from their IPO in order to push into the consumer electronics space.  Presently, the company’s technology can be seen on 5,321 theater screens, with the intention of expanding their presence to 4,900 additional screens.   This pits them head-to-head against IMAX in the quest to garner the expanding chunk of 3d box office revenues.

3d Financials (all data from the company’s filing prospectus):

  • From 2008 to 2009, company revenues grew at a 90% clip.  This was nothing compared to the 325% revenue growth from 2009 to 2010 (with Year End in March of each year).  Despite the impressive revenue growth, the company has failed to generate a profit off of its increased earnings power–for the year ended 2008, RealD lost $37.26 million on $23.3 million in revenues, and for 2010 RealD lost $51.22 million on $189 million in revenues.
  • In its IPO, the company will offer 10.75 million shares, of which the company itself is offering 6 million shares and a collection of existing shareholders are offering an additional 4.75 million. Through the offering, RealD plans to raise approximately $151 million for the company’s balance sheet.
  • Upon completion of the IPO, RealD will have nearly 50 million shares outstanding.  With an IPO priced between $13 and $15 a share, that gives the stock an initial market capitalization of somewhere between $650-$750 million.  Presently shares of IMAX trade with a market cap of $788 million, on revenues of $179 million in fiscal year 2009 and $73.8 million in the 1st quarter of 2010.  If the hype is anything like Tesla’s (TSLA), look for RealD to surge past IMAX in market capitalization, despite inferior fundamentals.
  • RealD plans to use the proceeds of the IPO in order to repay $25.1 million in existing loans and to further invest in the development and expansion of their technology.

Risk Factors:

  • RealD relies heavily on licensing arrangements with existing theater establishments.  Furthermore the company relies on studios producing and releasing motion pictures in 3d.  According to the company’s prospectus, “If motion picture exhibitors do not continue converting analog theaters to digital…our future prospects could be limited.”
  • RealD has “a history of net losses and may continue to suffer losses in the future.”  Unlike some of their primary competitors, Dolby (NYSE: DLB) and IMAX (IMAX), the recent 3d boom has not translated into an improved bottom line.  This puts their competitors in an advantageous position to garner investment and weather a potential slowdown in 3d growth.

Disclosure: Long IMAX. No other positions.

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