The 10 Biggest IPO Stocks

It’s possible that 2019 will be remembered as “The Year of the IPO” — short for “initial public offering.” When companies have their IPO, average investors like you and I can buy shares in the company on stock exchanges for the first time. And while the absolute number of IPOs is strong, it’s the size of the companies going public that’s really astounding.

To get an idea, check out the 10 biggest IPO stocks of the 2019, as of mid-July…

Company What It Does Current Valuation
Uber (NYSE:UBER) Ridesharing and delivery $72.1 billion
The We Company* Parent to shared workspace company WeWork $47.0 billion**
Airbnb* Online lodging and events marketplace $38.0 billion**
Zoom Video (NASDAQ:ZM) Video teleconferencing $23.8 billion
Slack*** (NYSE:WORK) Enterprise messaging software $18.6 billion
Lyft (NASDAQ:LYFT) Ridesharing $18.4 billion
Pinterest (NYSE:PINS) Visual idea discovery $14.1 billion
CrowdStrike (NASDAQ:CRWD) Cybersecurity $12.8 billion
Chewy (NYSE:CHWY) E-commerce pet food and supplies $12.7 billion
Beyond Meat (NASDAQ:BYND) Plant-based meat alternatives $9.5 billion

DATA SOURCE: YAHOO! FINANCE. VALUATIONS AS OF JUNE 26, 2019. *NOT YET PUBLIC — IS EXPECTED TO GO PUBLIC. **VALUATIONS ARE BASED ON ESTIMATES AND PRIVATE FUNDING ROUNDS. ***TECHNICALLY NOT AN IPO, BUT A DIRECT LISTING.

Why are there so many big IPOs this year?

With the stock market entering year 10 of an unprecedented bull run, the sheer number of IPOs isn’t surprising. When there’s a rising tide, it’s a good time to jump into the water — or so the thinking goes.

And, traditionally, taking your company public is seen as a badge of honor; you’ve “made it.”

But there’s more happening here than meets the eye. Of course, the ability to raise funds — especially in capital-intensive industries like telecommunications or manufacturing (ahem, Tesla) — is a crucial factor in going public.

Unlike decades past, however, there’s no shortage of funding available to companies from private equity firms. As Collaborative Fund partner (and former Motley Fool contributor) Morgan Housel recently explained, the VC landscape has changed dramatically: “The VC and private equity industry has grown enormously. It’s literally trillions of dollars in which 20 years ago it was a fraction of that, which has made it so that private companies can stay private for longer.”

IPOs today simply have more time to grow their valuations than in years past.

And there’s a second interesting anomaly at play: Many of these companies are unprofitable — with no clear path to profitability. How could this be? Again, from Housel:

Today these companies are staying private for a long time and they’re backed by venture capital funds and private equity funds. Those types of investors tend to have much more tolerance for the companies losing money.

Therefore, by the time these companies go public … these companies are a big, established 10-year-old decabillion-dollar companies. But in terms of their internal financials — their operating losses — they’re looking like brand new start-ups that are just bleeding money all over the place.

So where do the 10 biggest IPOs of 2019 stand? And should you consider buying them for your own portfolio? Let’s dive into the dynamics for each one below by looking at three key aspects of each company: financial fortitude, valuation, and sustainable competitive advantages.

Beyond Meat

Beyond Meat — more than any other recently public company — has capitalized on a food movement. The public is hungry for an alternative to the standard American diet. Beyond Meat is happy to offer one up.

The company makes meat alternatives (think: burgers, brats, sausages). Those products are sold in grocery stores (retail) and also at restaurants. As you can see below, the real story right now is Beyond Meat’s incredible popularity at restaurants.

Chart showing Beyond Meat revenue by type

DATA SOURCE: SEC FILINGS. CHART BY AUTHOR.

This helps explain why the company has seen its shares increase fivefold since going public in early 2019. And there are plenty of other meat-based products to replace in our diets.

But investors should beware of Beyond Meat for two big reasons. First, the company has been bleeding cash. For the trailing 12 months ending March 2019, the company lost $70 million in free cash flow. That’s a serious concern, because Beyond Meat had just $35 million in cash and investments on hand, and $30 million in long-term debt. It’s highly likely management will pursue a secondary offering — a good option at today’s elevated prices — which will dilute shareholders.

The larger long-term concern, however, has to do with the lack of a moat. Right now, Beyond Meat is benefiting from being one of the first-movers and top dogs in its industry. But there are many companies hot on its heels; Impossible Foods is the most obvious, but several traditional food purveyors are coming out with their own meat alternatives.

That means the only real advantage Beyond Meat has is its brand. If you believe that brand is worth buying a stock that as of mid-2019 was trading over 50 times sales — go for it. Otherwise, I think there are better places for your IPO-related cash.

Chewy

In 2017, PetSmart bought a fast-growing e-commerce company focused on pets. Chewy sends pet owners food, medicine, and other pet-related products in the mail.

Just two years later, PetSmart decided to spin off the e-commerce operation while still retaining 75% of the company’s shares. It’s not hard to see why PetSmart was willing to pay $3.35 billion for Chewy: As of mid-2019, PetSmart’s stake in Chewy was worth over $10 billion.

Of all the metrics worth watching at Chewy, I think the most important is the amount of Autoship sales. As the name implies, anything sent on Autoship means that pet owners have decided to get regularly scheduled deliveries of products. There’s no need to sign-on or pay.

This is as close to a subscription as you can get without actually being a subscription. Like subscriptions, this business model is also very sticky: Because it’s so automatic, it would take a terrible customer experience — or exorbitant prices — to get someone to switch away from Chewy.

As you can see below, the sales under the Autoship umbrella boomed from 2016 through 2018.

Chart showing Autoship sales growth at Chewy's

DATA SOURCE: SEC FILINGS. CHART BY AUTHOR.

Early 2019 results showed the trend continuing: Autoship sales grew 56% to $744 million during the first quarter.

As of March 2019, Chewy’s was still burning through cash: $58 million in negative free cash flow over the past 12 months. But it also has a stellar balance sheet: $88 million in cash and investments, no debt, and a deep-pocketed primary shareholder in PetSmart.

While it would be nice to see the company producing positive free cash flow, a stock that’s trading at just 3.6 times sales makes me believe Chewy could end up being a long-term winner from this year’s IPO class.

CrowdStrike

CrowdStrike will be the first of many companies covered here that focus on the software-as-a-service (SaaS) business model. In this model, a company spends lots of money up front to develop and market a software solution that helps other businesses.

Once those initial investments are made, the leverage really shows up: Customers are often locked in via high switching costs and network effects. And there’s virtually zero cost associated actually giving someone access to the software. Over time, there are plenty of chances for up-selling to new products as well.

CrowdStrike’s specific focus is on cybersecurity. The company’s Falcon platform uses artificial intelligence (AI) and machine learning (ML) to thwart cyberattacks in the cloud. There are currently 10 different cloud modules customers can choose to use within their own organizations.

In its prospectus, CrowdStrike did a great job of laying out both customer retention (on an absolute basis) and net retention. The latter figure is the most important: It takes the entire cohort of customers from one year to the next, and compares how much subscription revenue they are spending. By filtering out the effect of new customers, we get a better idea for whether or not existing customers are spending more over time.

Chart showing gross and net retention rates at CrowdStrike over time

DATA SOURCE: SEC FILINGS. CHART BY AUTHOR.

These are very solid numbers, which lead me to believe that CrowdStrike definitely has high switching costs embedded in its business model. Just as important, however, is the fact that the company gets stronger as its AI/ML get stronger. That means the data that each additional customer brings on board makes the overall service better for all users.

Like the other IPOs mentioned thus far, CrowdStrike has been bleeding money: It lost $47 million in free cash flow over the trailing 12 months ending in March 2019. That said, the combination of dual moats, a cash hoard of $192 million in March 2019, and zero long-term debt make me believe this company could be on to something.

Investors should beware, however: Shares aren’t cheap. Trading at over 50 times trailing earnings as of mid-2019, there are clearly high expectations baked into the stock. If you want to buy shares, I suggest initiating a small starter position now, and adding to it at better value points (read: lower price-to-sales ratios) over time.

Pinterest

Pinterest is an enormously popular site for DIYers across the globe. The company has…

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