2019 has arguably been the best year for IPO stocks in two decades. Sure, other years have had one or two big offerings that have captivated the market. But 2019 is shaping up well for both the breadth of the IPO stock pool and the star power of some sizzling headlining names.
Not only do we have the seven IPO stocks discussed below, there are more on the way such as Slack and AirBnb. After years of many of the country’s fastest growth companies remaining stuck in venture-capital hands, we public investors are getting our shot at a ton of exciting growth companies.
But discretion is required. Not all new IPOs are bound for greatness. In fact, with the IPO stock window wide open, banks are using this opportunity to push out all sorts of new offerings to the public. Some of these will work out well, and others will be flops. Here’s what you need to know about seven of the year’s biggest IPO stocks so far.
Hot IPO Stocks: Uber (UBER)
Morgan Stanley’s Michael Grimes is developing a spotty reputation. The bank’s leading IPO dealmaker was responsible for both the Facebook (NASDAQ:FB) and Uber (NYSE:UBER) IPOs. FB stock dropped more than 50% in the months after its IPO. Meanwhile, the Uber IPO came in far short of expectations and has traded fairly poorly, even after the downbeat IPO price.
However, if we learned anything from Facebook stock, it’s that a flop IPO isn’t a death sentence for a public company. After its terrible trading debut, Facebook turned the corner. Mobile advertising started to take off and shares now trade for around 4x their IPO price. Will Uber be able to make a similar turnaround?
Uber’s financials are certainly troubling. The company isn’t a huge profit generator like Facebook, at least not yet. But it’s the leader in ride sharing both in the U.S. and dozens of overseas markets. On top of that, Uber has advanced aggressively into other adjacent markets, like food delivery.
Uber is a high-risk, high-reward play, for sure. There’s a chance that the company will never become profitable and go bust. But it’s the clear dominant market leader, and the market should reward them for that.
Don’t invest funds that you can’t afford to lose, but if you have a high risk tolerance, UBER stock is a buy here.
To be fair, Lyft (NASDAQ:LYFT) stock hasn’t been one of the hot IPO stocks over the past weeks. In fact, it has taken quite a tumble since it IPOed at $72 and subsequently started trading at $87. As always, however, price matters. Lyft stock is a far more interesting investment candidate here at $55 than it was when the stock debuted.
There are good reasons to be bearish on LYFT stock. Our Dana Blankenhorn offered a solid take. He warned about the company’s share lock-up expiry in September, its issues with self-driving vehicles and its potential for running out of cash before it becomes profitable. These are all valid concerns. Their first quarterly earnings report did nothing to impress those who are doubting Lyft’s business model either.
But I think it’s too early to throw in the towel on Lyft as an investment idea. Ride-sharing is already a big market, and it’s only going to get bigger in coming years. In the U.S., Uber and Lyft dominate the market with little additional competition. As such, this offers an opportunity for both firms, gradually, to raise prices and reach profitability or at least slow down cash burn.
It’s possible that LYFT stock collapses, particularly if the stock market as a whole goes south. But for now, the company’s rapid growth should be enough to keep traders interested in the stock at its significantly reduced valuation. I rate LYFT stock a hold.
Beyond Meat (BYND)
Beyond Meat (NASDAQ:BYND) has taken the stock market by storm, offering the hottest-trading IPO of the year so far. BYND stock, which IPOed at a measly $25 per share, has now soared to as high as $97 and even after a big drop today is still holding around the $82 mark now.
First things first, Beyond Meat has a great story. The company offers what many are saying is the most compelling meatless burger option to date. Competitors have been trying to launch a plant burger since the 1980s, but it has been hard to get the texture and taste right. Apparently Beyond Meat has gotten closer than most. As a result of its success, Beyond Meat is picking up distribution rapidly in grocery stores and restaurants. Almost every week, we’ve been hearing about a new restaurant partnership.
Unfortunately, the market has taken this great story and blown it totally out of proportion. BYND stock is now selling at 60x its annual revenues. Yes, Beyond Meat is doubling its revenues every year for the time being. But even at that growth rate, it’d still be selling for 15x sales in 2021. That’s ridiculous for a food company. I’d be hard-pressed to justify more than 7x sales for a food producer once the growth rate starts to slow down.
BYND stock made a lot of sense at its IPO price. Up here, however, it’s simply priced too high to succeed. Other companies aren’t going to acquire Beyond because it’d be too dilutive at this price-to-sales ratio. Meanwhile, Impossible Foods, funded by the likes of Bill Gates, is ramping up their competition to Beyond in the plant-based protein space.
Once the hype wears off and the trading float frees up, BYND stock will drop sharply. That’s not a judgment on the company. The valuation is simply too high for Beyond Meat’s extremely limited sales and large losses at the moment. Needless to say, I rate BYND stock a sell.
Sometimes Wall Street can miss stocks if most analysts are outside of a company’s core market. An example of this was Etsy (NASDAQ:ETSY). The stock started trading in 2015 around $28 per share. It traded down to below $10 at one point, and skeptics were giddily writing the company’s obituary. The tables turned, however, as Etsy was able to prove its business model worked, and the stock has shot up more than 500% in recent years.
There’s no guarantee that Pinterest (NYSE:PINS) can be another success like Etsy, but I see the same opportunity for a misunderstood business model. Sure, Pinterest may not have the same wide user base as other social networks/shopping sites. What it does have is a core passionate user base. And at 80 million monthly active users in the U.S., there’s certainly enough of a business here to achieve profitability if revenue per user can ramp up.
Interestingly, the current valuation for PINS stock is just $15 billion or so. The company last raised money on the private market in 2017 at a valuation of around $12 billion. That means the company’s growth since then — including 60% revenue growth last year — is coming at a reasonably cheap price for new shareholders.
Sure, the company’s first earnings report was a big dud and killed the stock’s momentum. But that gives folks a chance to buy again at a decent price. Pinterest will need a better earnings report next time to get investors excited again. There’s certainly a decent investment case though, regardless. I rate PINS stock a hold.
Luckin Coffee (LK)
Luckin Coffee (NASDAQ:LK) just launched its IPO last Friday. The IPO priced at $17 and traded to as high as $25 on its opening day. The caffeine high has quickly worn off, however, as LK stock is already back down below $19. Unfortunately for its shareholders, I see LK stock dropping a lot lower over the next year.
On the surface, Luckin seems like an exciting opportunity. The company is aiming to be the Starbucks (NASDAQ:SBUX) of China. It has already expanded from a handful of stores at the end of 2017 to more than two thousand stores today. According to its IPO documents, it intends to overtake Starbucks in total store count by the end of this year. That’s some pretty amazing growth.
Unfortunately, Luckin’s business model doesn’t appear to be nearly as robust as Starbucks’. Last quarter, for example, the company had an operating loss of $78 million on just $71 million of sales. That’s an incredible rate of money burning. Just cost of goods sold and rent for the store locations alone cost more than all the cash Luckin took in, and that’s before you get to SG&A, marketing and other essential costs.
Luckin needs far more sales from each store. Just setting up hundreds more stores will do little to fix the company’s gaping losses when each store is losing so much money as it is. To make matters worse, Luckin’s sales trajectory has slowed dramatically. I rate LK stock a sell. It has a ton to prove or shareholders will be dumping Luckin in a hurry.
Tufin Software (TUFN)
Tufin Software (NYSE:TUFN) isn’t the most popular of the IPOs on this list, but it could just end up delivering the best results for shareholders over the years. Tufin Software is a security services play. Two ex-employees from highly successful security firm Check Point (NASDAQ:CHKP) founded Tufin almost 15 years ago and have built it into an emerging power.
Even though TUFN stock has already traded up from $18 to $22 following the IPO, it still represents solid value here. Its current share price represents a market cap of $730 million. That amounts to about 9x sales for a company that is growing revenues annually around 20%. Revenues have grown from $65 million to $85 million last year, and are on target to exceed $100 million this fiscal year.
Impressively, Tufin is already right on the verge of profitability. It has been generating EPS generally within a few cents of breakeven in recent quarters and has even come up with a couple of quarterly profits. Unlike many recent IPOs, TUFN stock priced at a reasonable valuation, leaving some gains on the table for its new retail shareholders. I rate TUFN stock a buy and wouldn’t be surprised if it trades up to $30 over the next year.
Zoom Video (ZM)
Zoom Video (NASDAQ:ZM) has lived up to its name. ZM stock has zoomed from an opening day price of $62 to as high as $91. It’s even more impressive when you realize that the stock IPOed at just $36. Zoom even managed to hit a new high on Monday before reversing as the stock market turned downward on China worries. I’d wait for a much bigger decline before considering a purchase of ZM stock, however.
The main obstacle here is price. The company is selling at an incredible 65x sales at the moment. Generally, it’s wise to avoid companies trading above 10x sales. Certainly, if a company is going for more than 20x sales, it has to have a stratospheric growth rate to justify it.
Zoom doubled revenues last year, but it already appears to be slowing down a bit. It gets exponentially harder to maintain blistering sales growth as your base of revenues expands. By 2021, it wouldn’t be surprising if Zoom’s revenue growth rate is down to 50% annually. That’d still be great if the stock’s valuation were more reasonable. But investors are paying more than $20 billion today for a company that has just $330 million in annual sales. That’s an insane price. I rate ZM stock a sell and see it dropping back toward its opening print around $60.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.