The IPO market is red hot right now, and investors’ appetite for zero-profit IPO’s is being tested. Lyft LYFT, who hasn’t yet turned a profit, has been the largest IPO thus far in 2019 being initially valued at $24.3 billion. After 2.5 weeks of trading, the company has lost over 28% of its value. As an investor, you have to think about what kind of implications this has on the next big profitless IPOs.
The percentage of IPOs with a negative EPS has grown drastically since the dot-com bubble popped in 2000 and we are now seeing over 80% of IPOs not turning a profit before going public.
Facebook FB went public back in May of 2012 for just over $104 billion. On May 18th, 2012 it opened at $38 per share and 3 months later it had lost more than 50% of its value and was trading at $18 a share. Facebook has since yielded investors 890% returns. This is exemplifying that a company’s first few months of trading is not indicative of how the stock will perform in the years to come. The first few months of trading the market is attempting to find the right fair value and can be very volatile.
Facebook, Inc. Price
Tomorrow we have 6 IPOs to look forward to, most notably social media platform Pinterest and video chat application Zoom. Pinterest is expected to be valued at $8.5 billion (more than 10x price/sales) with a share price ranging from $15-$17, but analyst familiar with the IPO are expecting a price closer to $19 a share. This valuation is less than the last private funding round that valued the company at $12 billion or $22 a share. Zoom is estimated to have an IPO price in the range of $28-$32 per share but analysts are pushing that range to $33-$35 a share. This would value the company at $8.9 billion much more than the $1 billion in latest round of private funding.
Pinterest is posting a shrinking deficit but still at a net loss of $63 million in 2018. Zoom just became profitable at the end of their fiscal year in January posting profits of $7.6 million. Both of these companies have top-lines that are growing exponentially.
Pinterest has grown revenues 59% year-over-year for the past 3 years to over $750 million, and its deficit was cut in more than half from last year. Pinterest is still in the early stages of monetization and the future of the company is going to be dependent on their ability to scale this monetization (primarily driven by advertising). Below you can see the monthly active users (in millions) has grown drastically outside the United States.
Pinterest has been able to capitalize on the monetization of US users but hasn’t been able to capture the same revenue per user from international users (seen below an an annualized basis). With the capital that Pinterest gains on this IPO, they plan on scaling their business further in international markets to capture more revenue per users.
Zoom, on the other hand, is one of the few tech companies that is going to be profitable going into their IPO this year. This company’s revenue has been expanding at an annualized rate of 133% for the past 2 years to $330.5 million. That puts this expected IPO valuation to be at over 27x price/sales. Zoom is a smaller operation than Pinterest but is going to be valued at a high multiple because it has turned a profit.
The Lyft Effect
These tech IPOs won’t necessarily have the same, plummeting after offering effect, that Lyft did. Lyft was the first ride-hailing company to go public and it was a name that everyone knew. People just wanted to get in at any price so we saw this stock surge on its first day of trading. Then reality set in and investors started questioning the fundamentals of the company and the underlying assumptions that brought the IPO price to where it was at.
Ride-hailing is an incredibly competitive space that isn’t going to yield broad enough margins to be trading at over 10x sales, especially when no distinct competitive advantage is evident. Investors started getting short and as of the beginning of this week, over 50% of LYFT’s free-floating shares had a short interest. The ability for Lyft to turn a profit while still being competitive with Uber and other ride-hailing business is going to be incredibly tough.
Pinterest and Zoom aren’t seeing the same diminishing margins that ride-hailing apps are experiencing and will not necessarily see the boom and bust that Lyft did.
All of the recent IPOs weren’t a disaster for investors though. Levi Strauss LEVI has risen over 6% in the last 3.5 weeks since its offering. Being an established business that has a consistent top and bottom-line makes this an entirely different animal than the tech companies I have been discussing.
Uber filed its IPO April 11th and is the most anticipated offering of the year. Uber is expected to be valued at $120 billion putting its valuation at just over 10x price/sales. Uber is more diversified than its competitor Lyft. Additional Segments include Uber Eats (a food delivery service) and Uber Freight (a freight broker). Uber is also an international operating in 63 different countries. These competitive advantages that separate Uber from Lyft and other ride-hailing services are what investors hope will push its valuation into the stratosphere.
When deciding whether to get in on the ground floor of Pinterest or Zoom make sure you do your due diligence and have a good price range in mind that would make this an equitable buy for you. I personally wouldn’t touch Pinterest above $17 and wouldn’t get into Zoom above $32. There is a reason that the IPO ranges are set as they are. Keep an eye out for an over interest in the stocks that isn’t being driven by any fundamentals. It is typical for these household name tech IPOs to trade up quickly just because people want in. I would personally wait for the dust to settle before putting on a position.
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