Bulls In The 2019 IPO Market

This year's IPOs have not all been tragic with some firms performing above and beyond what analysts projected. Read More...

The 2019 IPO market started red hot with investors eager to be a part of these intriguing companies. 2019’s IPO market was underlined by unprofitability and business models that the investment world hadn’t experienced before.

The past week has been pivotal for the IPO markets as WeWorks and Endeavor Group pull their offerings and Peloton drops the ball in its public debut. The bleeding balance sheets of these recently public companies has most IPO investors in the red this year.

I discuss Peloton’s PTON disappointing debut, the unproven ride-hailing business models, and unoriginal product offerings that are framed as innovation in my article Peloton (PTON) Is The Latest Skid Mark In 2019’s IPO Bonanza.

This year’s IPOs have not all been tragic with some firms performing above and beyond what analysts projected. Below I will take a look at some of 2019’s IPO winners.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Beyond Meat BYND” data-reactid=”15″>Beyond Meat BYND

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This plant-based burger company has produced shareholder returns that are far beyond anything I would have predicted. BYND was priced at $25, but its first public trade was 84% above that when its shares were debuted on May 2^nd. Today these shares are trading at $147 or 488% above its IPO price.” data-reactid=”23″>This plant-based burger company has produced shareholder returns that are far beyond anything I would have predicted. BYND was priced at $25, but its first public trade was 84% above that when its shares were debuted on May 2^nd. Today these shares are trading at $147 or 488% above its IPO price.

Analysts continue to raise EPS estimates on this fortuitous stock, as plant-based meat substitutes intrigue consumers around the globe. Despite heavy competition in the market place, Beyond Meat is expected to triple its topline this year and turn a profit as soon as next year. This is due to the strategic partnerships that BYND was able to secure.

You can now find Beyond Meat products at over 15,000 restaurants, hotels, universities and beyond, according to the company’s website. It most recently secured a partnership with McDonald’s MCD, which is going to make a significant ally in this aggressively saturating space. These partnerships will lock in topline revenues, and the fight for alliances in the plant-based meat category will make or break firms’ ability to stay afloat.

Competition is only going to get steeper for this firm, and its ability to remain a leader in this space is going to come down to pricing, brand recognition, and quality superiority.

BYND is trading at a forward P/S of 23.8x and has been exceptionally volatile since its IPO as zealous investors decide on a fair intrinsic value for this stock. I would not put a position on these share at this time considering the competition risk and excessively high expectations.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pinterest PINS” data-reactid=”28″>Pinterest PINS

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pinterest was the big social media IPO of the year and debuted its shares to the public on April 18^th. The shares were initially priced at $19 a share but closed their first day of trading at $24.99, rallying over 31% day one.” data-reactid=”40″>Pinterest was the big social media IPO of the year and debuted its shares to the public on April 18^th. The shares were initially priced at $19 a share but closed their first day of trading at $24.99, rallying over 31% day one.

Pinterest is a niche social media platform that can be described as an idea board where people can share things such as recipes or home décor idea. It’s a fast-growing business with an accelerating topline that hasn’t fallen below 50% year-over-year growth.

The key driver of the business is a combination of monthly active user (MAU) expansion and average revenue per user (ARPU) appreciation. MAUs have been growing at a rate of over 20% for the last 5 quarters, with international advancement driving the majority of that growth. Below is a graphic from Pinterest’s Q2 investor presentation on page 4.

International users make up over 70% of the firm’s user base but account for less than 10% of the firm’s revenue. There is a substantial amount of opportunity for Pinterest to further monetize its global users, and it has proven its ability to do so with its ARPU continuing to expand internationally.

Pinterest is trading at a forward P/S of 10.3x which is in line with the growing Snapchat SNAP business, but above the more established Facebook FB which is trading at a P/S of 6.2x.

Pinterest has been trading all over the board since its IPO in April, trading in the range of $24 to $36. Currently, PINS shares are trading at $26.33.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Zoom ZM” data-reactid=”53″>Zoom ZM

Zoom IPO’ed at $36 and jumped when it hit the markets to $65, an over 80% surge in value. ZM has continued to rally since its IPO and is trading at $76.37 today. Analysts have been increasingly optimistic about this enterprise communication company, raising EPS estimates and pushing ZM into a Zacks Rank #2 (Buy).

Zoom is a cloud-based enterprise communication software that offers “frictionless video, voice, chat and content sharing and enables face-to-face video experiences for thousands of people in a single meeting across disparate devices and locations,” according to the firm’s prospectus.

Zoom is a trusted enterprise communications platform for the companies of tomorrow. Some of its key customers include Uber UBER, Splunk SPLK, Wells Fargo WFC, and Workday WDAY.

Zoom was one of the few big IPOs this year that actually illustrated profitability going into its public debut. Zoom has also been able to double its topline for the past 2 years. This year analysts are expecting revenue growth of 75%, but I estimate that it will be closer to 100% as it continues to beat analysts’ expectations.

Zoom is a subscription cloud-based company with 74% of its revenue being reoccurring. This subscription model allows investors to be comfortable with excessively high valuation multiples. Currently, ZM is trading at a forward P/S of 29x.

I like ZM’s product offering and see a sizable amount of potential growth for this stock moving forward. There is still risk in its current valuation, especially as we head towards the end of the business cycle. None the less, I see ZM as a robust long term play for your portfolio of the future.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Take Away” data-reactid=”67″>Take Away

2019 has been a rocky year for IPOs with 76% of firms debuting their share to the public at a deficit. Investors’ are losing their appetite for unprofitable companies, but there were some diamonds in the 2019 IPO rough.

Beyond Meat debuted its shares right as plant-based burgers were on an uptrend, showing shareholders returns they would never have thought possible. Pinterest provides a niche social media platform that has found a sizable market globally and continues to proliferate its topline. Zoom’s enterprise communication platform is creating a dynamic workplace communication medium for companies of the future.

All of these unique product offerings have given investors a reason to buy into these recently IPO’ed stocks. Keep an eye on these innovative firms as they continue to progress.

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