Two consumer-facing IPO stocks have stood out for investors in the first six months of 2019.
First, Beyond Meat (NASDAQ:BYND), the meatless burger taking the world by storm, went public on May 1 at $25 a share. Since then, it’s gained 468% through June 13, and that’s with a big two-day selloff on June 10 and June 11.
The second IPO to turn heads is Revolve Group (NYSE:RVLV), the California online fashion retailer. It went public on June 6 at $18 a share. It’s up 103% through June 13, an annualized total return of more than 5,000%.
The odds of it delivering a 5,000% return in one year is slim to none.
Will it be one of the IPO stocks from the first half of 2019 to falter most in the second half? It very well could be.
New Fortress Energy (NFE)
New Fortress takes diesel and heavy fuel oil and turns it into natural gas or gas-fired power. It sells these two items to customers who sign long-term, take-or-pay contracts. Utilizing an integrated liquid natural gas (LNG) production and delivery model, it plans to take advantage of the gap that exists between the supply and demand of LNG.
New Energy Holdings is controlled by Fortress Investment co-CEO Wes Edens, a 57-year-old billionaire who owns a piece of both the Milwaukee Bucks and Aston Villa in the Premier League.
Edens believes that U.S. natural gas exports to countries that have historically relied on oil imports to generate power are a winning proposition, which is why he co-founded it in 2014 and took it public in January.
New Energy lost $36.5 million in the nine months ended September 30, 2018, 164% higher than its operating loss in the same period a year earlier.
To be successful, it’s going to burn through a lot of capital. I don’t see it going well. However, he’s a billionaire and I’m not, so you never know.
Gossamer Bio (GOSS)
The company, according to its prospectus, is “a clinical-stage biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutics in the disease areas of immunology, inflammation and oncology. Our goal is to be an industry leader in each of these therapeutic areas and to enhance and extend the lives of patients suffering from such diseases.”
It’s an admirable goal to be sure.
Gossamer Bio initially expected to sell 14.4 million shares. However, serious interest from investors upped the number of shares sold to 17.3 million. It was the second biotech company of 2019 to go public at a valuation of more than $1 billion. In 2018, 58 biotechs went public, and only five were able to achieve a “unicorn” valuation.
Gossamer is using the net proceeds to advance its best potential commercial drug — GB001 is a treatment for asthma — which is in Phase 2b clinical trials.
In its first quarter as a public company, Gossamer Bio had no revenue and $34.0 million in operating expenses, compared to no revenue and $26.1 million in operating expenses in the same period a year earlier.
Wouldn’t it be wiser to invest in a biotech ETF or profitable biotech company than this IPO stock?
Levi Strauss & Co. (LEVI)
Levi Strauss & Co (NYSE:LEVI) went public on March 20 at $17 a share selling $623 million of its stock. It gained 31.8% on its first day of trading but has since given some of those gains back, up 21% through June 13.
In March, before Levi Strauss going public, I suggested seven reasons why investors should steer clear of its IPO. LEVI stock has made me look silly through the first three months as a public company.
CEO Chip Bergh acknowledged that its growth was broad-based across channels and regions.
However, I’m not about to change my tune despite the fact the maker of jeans had a good quarterly report with revenues of $1.44 billion, 7% higher than a year earlier, and adjusted net income of $151 million, 81% higher than the same quarter a year earlier.
Of the $623 million in shares sold to the public, most were by selling shareholders; only $121 million in net proceeds went to the company. Frankly, with the company planning to open almost 100 stores in 2019, I could see its debt situation getting worse.
It finished the first quarter with net debt of $319.2 million, $20 million less than at the end of November. The company has $500 million in fixed-rate debt at 5.0% interest and $542 million in fixed-rate debt at 3.375% interest. All due in 2024 and beyond.
A retail company as iconic as Levi Strauss should not have any debt on its books — even if it technically a recent IPO stock.
Tradeweb operates electronic marketplaces for asset managers, hedge funds, insurance companies, and many other large financial institutions to trade various asset classes including equities, credit, and money markets. It has more than 2,500 clients operating in 62 countries around the world.
On May 8, Tradeweb announced solid Q1 2019 earnings with revenues up 10.2% to $186.8 million on adjusted net income of $52.2 million. Except for its market data segment, all areas of its business had double-digit revenue gains in the quarter.
With zero debt and $362 million in cash on the balance sheet, I don’t believe there’s anything wrong with Tradeweb’s business. I just feel like it’s overvalued at 35 times cash flow and 46 times forward earnings.
Of all the IPO stocks on this list, Luckin is the one I’d be most wary of — primarily because it’s trying to steal Starbucks’ (NASDAQ:SBUX) thunder in China. Also, the coffee market in China continues to see new, larger entrants like Restaurant Brands International’s (NYSE:QSR) Tim Hortons and others, enter the scene, making it doubly hard for Luckin to become profitable.
It’s important to remember that Luckin is less than two years old. Going public with a valuation over $5 billion, that’s pretty rich for a company that lost $238 million in 2018 on just $125 million in revenue.
If Luckin operated in South Africa, not China, would you still be enthusiastic about investing in a coffee business that loses $2 for every $1 of revenue?
I highly doubt it.
Revolve Group (RVLV)
Revolve Group, as I stated in the beginning, went public on June 6 at $18 a share. Despite doubling in price, it continues to receive a lot of positive attention from Wall Street professionals.
On June 7, Citron Research tweeted that it expects to see Revolve stock hit $50 because of its use of technology and social media to acquire new customers profitably. Citron estimates that Revolve spends $100 to bring in $300 in revenue, a sign that it’s got significant growth ahead of it.
On June 12, Jim Cramer of CNBC jumped into the fray, suggesting that RVLG ought to be on investors’ shopping list.
“They’ve been consistently turning a profit for years now. This is not your typical red-hot IPO that’s all about revenue growth with no concern for earnings,” Cramer said on Mad Money. “The only negative is that their margins took a little hit in the first quarter, but that’s because they rolled out their new, lower-price concept Superdown.”
If you look at Revolve’s prospectus, it’s easy to see what Cramer means.
In 2018, Revolve had an operating profit of $41.8 million, about double its operating profit from a year earlier, on $498.7 million in revenue. That’s an operating margin of 8.4%, 330 basis points higher than in 2017.
With more than $30 million in cash at the end of March and zero debt along with a portfolio of 21 of its own brands, innovation seems to be Revolve’s calling card.
However, with a $2.7 billion market cap, investors are paying 84 times cash flow. By comparison, you can get Lululemon (NASDAQ:LULU) for 31 times cash flow despite the fact it’s up 41% year to date through June 12.
Beyond Meat (BYND)
Beyond Meat is a great product. I’ve eaten its burgers both at restaurants and at home. Every time’s been an enjoyable, tasteful experience. So, you won’t get any complaints from me about the quality.
Long term, I can see it becoming huge.
However, when you have no analysts recommending its stock, you know it’s a valuation bubble just ready to pop.
On June 12, Bernstein downgraded Beyond Meat from outperform to market perform with a $123 target price. Eight analysts are covering its stock at the moment with all eight giving BYND a hold.
“The downgrade is driven by valuation considerations as the stock has traded in a highly volatile manner since its IPO likely due to its limited public float and is now trading at ~31x EV/NTM Sales, implying limited upside potential from a valuation perspective,” wrote Bernstein’s Alexia Howard.
Like several of the stocks on this list, I believe that its stock can be bought later this year or early in 2020 at a much better entry point.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.