2019 has been a big year for initial public offerings. The year saw the arrival of some of the most anticipated IPO stocks in years, among them Uber (NYSE:UBER) stock.
Indeed, it’s possible that 2019 will set a record for the most capital raised, topping the $97 billion raised in 2000. WeWork and Peloton are among the well-known companies likely to go public before year-end.
That said, post-IPO performance has been mixed. UBER stock, most notably, has been a flop. On the other side of the coin, a food-tech play has been one the best performers of all time, at least in the early going.
What matters at this point, of course, is not how these IPO stocks have traded so far — but how they’ll trade going forward. In some cases, big gains should continue. In others, early stumbles might look like a buying opportunity — or a worrisome omen. After all, in many ways the IPO is the easy part. It’s keeping investor attention after the offering that can be much more difficult.
IPO Stocks: Uber (UBER)
Uber’s IPO got off to a rocky start: Its $45 IPO price gave way almost instantly.
UBER stock managed to grind back to those levels on a few occasions. But a disappointing second quarter earnings report last month sent shares tumbling. Uber stock neared $30 late last month before a recent bounce.
The performance might be even worse than a 29% decline from the IPO price suggests. Uber executives reportedly wanted a $120 billion valuation ahead of the offering. The company’s current market capitalization is less than half that.
As I wrote last month, whether UBER stock can rebound likely comes down to one key factor: investor trust in the business model. It might seem stunning given the $58.6 billion valuation, but many investors still believe that the Uber business model will never be consistently profitable.
The argument is that Uber simply has bought its growth through driver and rider incentives. To become profitable, those incentives will have to go away. But if and when those incentives go away, Uber’s driver and rider pools both shrink.
From that standpoint, the cheaper Uber stock price doesn’t change the case all that much. If the model works — if Uber can truly revolutionize not only the taxi industry, but food delivery and even freight — UBER stock probably rises. If it doesn’t, the stock would plunge.
It’s hard to know for certain which scenario plays out — but one can at least reasonably assume that Uber stock is going to make a big move going forward.
For Uber’s ride-hailing rival, Lyft (NASDAQ:LYFT), post-IPO trading hasn’t been much better. LYFT, too, quickly dipped below its IPO price of $72. Like UBER stock, it touched an all-time low last month. And at least relative to its initial price, LYFT has underperformed, declining 38% against Uber’s 29%.
The broad question about the viability of the ride-hailing model obviously applies to Lyft as well. But there are two key differences in the stories.
First, Lyft remains much smaller. Its revenue in the June quarter was less than one-third that of Uber. Of course, that may not necessarily be a bad thing. Lyft clearly has gained market share over the past few years, helped in part by the scandals at Uber. Continued share gains give Lyft a path to better growth going forward than Uber — and potentially quicker profitability.
Second, Lyft doesn’t have a delivery business, as Uber does with UberEats. And that might be a weakness, given investor hopes for UberEats rivals like DoorDash and GrubHub (NYSE:GRUB).
Meanwhile, LYFT stock still trades at a premium to UBER stock on a price-to-revenue basis. That seems a bit surprising. Investors right now are pricing in further market share gains for Lyft, no matter how the actual market plays out. If Lyft disappoints on that front, the declines could continue.
To some investors, online pet food retailer Chewy (NYSE:CHWY) looks a lot like UBER stock. Yes, growth has been impressive: 2018 revenue was eight times that generated just three years earlier.
But, like Uber, bears argue that Chewy simply is creating unprofitable revenue. Indeed, well-known investor David Einhorn compared CHWY stock to that of Pets.com, one of the most infamous of the dot-com bubble stocks.
That comparison seems unfair, however. Pets.com generated less than $6 million in revenue in 1999, and was bankrupt just a few months later. Chewy is on track to bring in almost $5 billion in revenue this year, has plenty of cash on the balance sheet and is tracking toward EBITDA profitability.
A valuation of $13 billion-plus admittedly is concerning, particularly given that PetSmart paid one-quarter as much to acquire Chewy a little over two years ago. But as a satisfied Chewy customer, I see growth continuing and profitability arriving. If that’s the case, CHWY’s post-IPO sideways trading should turn into upside soon enough.
Levi Strauss (LEVI)
Denim manufacturer Levi Strauss (NYSE:LEVI) returned to the public markets this year for the first time since 1985. But, at least so far, early returns have been disappointing.
LEVI stock got off to a nice start, gaining 32% in its first day of trading in March. But a disappointing fiscal Q2 report undercut the stock. Friday’s close of $17.08 leaves LEVI almost exactly even against its IPO price of $17.
Near the lows, there’s admittedly an intriguing case for LEVI stock. A forward price-to-earnings ratio of just 15.9 leaves valuation reasonable. Growth has been impressive in recent years. Denim demand seems to be holding up well, given results from the likes of American Eagle Outfitters (NYSE:AEO) and Wrangler owner Kontoor Brands (NYSE:KTB), a spinoff of V.F. Corporation (NYSE:VFC).
The worry, however, is that Levi’s strong results heading into the IPO aren’t sustainable, as a turnaround effort largely is complete. The company still has a big retail business at a time when investors want no part of retail. LEVI looks intriguing here — but it’s tough to argue that it looks compelling.
Shares of cybersecurity company CrowdStrike (NASDAQ:CRWD) are heading in the wrong direction. Like so many tech IPO stocks in recent years, CRWD got off to a hot start, peaking at just shy of triple its IPO price of $34.
The stock now has given back about a quarter of its value, however. Earnings and guidance both looked strong in last week’s fiscal Q2 report, but the stock slid anyway.
It’s likely valuation is a factor. After all, this is a stock trading at roughly 40x this year’s revenue guidance, even backing out cash. That’s one of the highest figures in all of tech (though not, as we shall see, the highest).
That said, investors have been rewarded in this market for focusing on growth over valuation. And CRWD now is back toward levels seen before its first-quarter report. In that report, too, CrowdStrike beat estimates and gave above-consensus guidance. CRWD stock jumped 15% on that release. Why sentiment has reversed isn’t necessarily clear — but if and when it turns back, CrowdStrike stock will be one of the better growth stocks out there.
Zoom Video Communications (ZM)
The story at video communications provider Zoom Video Communications (NASDAQ:ZM) sounds awfully like that of CrowdStrike.
Zoom went public two months earlier, and its shares, too, initially soared. In fact, just like CrowdStrike, its stock stopped just pennies shy of tripling. CRWD since has fallen 25% from its highs; ZM stock has dropped 20%.
Like CrowdStrike, strong fiscal Q2 earnings from Zoom Video last week were met by investor selling. ZM stock fell 8% on Friday, the day after its earnings release. And like CrowdStrike, the stock still looks dearly valued. ZM trades at an almost unfathomable 45x the FY20 consensus revenue estimate.
Where does Zoom go from here? It seems likely that, at least in the near term, it’s going to be market factors that answer that question. As I wrote in April, ZM truly is the perfect stock for this tech market. Growth is enormously impressive, the opportunity is huge, and yet the valuation seems to incorporate all of the good news. As long as investors will keep paying up for growth, ZM stock can rebound. If and when valuation concerns arrive, however, ZM is one of the stocks most likely to crash.
Luckin Coffee (LK)
China’s Luckin Coffee (NASDAQ:LK) has been one of the more middling IPO stocks so far this year. The IPO priced at $17, and closed its initial day of trading at $20.38. Since then, however, LK stock has gained just 1%.
That said, for a Chinese consumer play, even flattish performance doesn’t seem that bad. Trade war worries have led to selling pressure on a number of Chinese stocks, but LK stock has managed to hold up and keep an aggressive valuation of about 6x revenue.
Even management from Starbucks (NASDAQ:SBUX), which is aggressively targeting the Chinese market, admitted at a recent conference that Luckin’s growth was impressive. But Starbucks CFO Patrick Grismer also noted that Luckin’s revenue growth has come from “extreme marketing and very aggressive discounts.”
Between valuation and what may be marketing-fueled hypergrowth, LK clearly is a high-risk play. For investors who see the selloff in Chinese stocks as overdone, however, Luckin Coffee stock could be worth that risk.
But PINS stock has weakened of late, dropping 18% from August highs following a strong Q2 report. As with other IPO stocks, valuation concerns may be a factor. PINS still trades at about 15x 2019 revenue estimates.
With year-over-year revenue growth likely near 50%, however, that valuation doesn’t seem all that extreme, at least in this market. Pinterest clearly has a solid niche, though InvestorPlace’s Josh Enomoto worried that its demographics might be too narrow. That proved to be a significant issue for Snap (NYSE:SNAP), which still trades below its 2017 IPO price amid concerns that its potential beyond younger customers is limited.
With PINS heading toward levels seen before Q2 earnings, there may be a near-term trading opportunity. Longer term, the performance of PINS likely boils down to whether the company can convince investors its torrid revenue growth can continue for years to come.
Slack (NYSE:WORK), too, was a victim of a tough week for IPO stocks. WORK stock dropped as much as 16% following second-quarter results due to weak guidance. Shares recovered most of those losses — but then fell almost 7% on Friday.
To be fair, WORK isn’t necessarily an IPO stock. Like Spotify (NYSE:SPOT), the company went public via a direct listing, not an actual IPO. Ignoring that distinction, however, WORK clearly has been one of 2019’s worst new issues.
After Friday’s losses, WORK is almost back to its initial price of $26. Guidance is concerning. Competition, most notably from Microsoft (NASDAQ:MSFT), remains intense. And it’s not as if the decline makes WORK cheap. The stock still trades at 25x FY2020 revenue estimates and profitability remains a long ways off.
Right now, WORK looks like a falling knife. And with at least two-plus months until the next earnings report, patience is required.
Beyond Meat (BYND)
Beyond Meat (NASDAQ:BYND) has been the best of 2019’s IPO stocks. Even with a pullback from late July highs, the stock is up over 500% from its IPO price of $25.
Those gains have drawn quite a bit of scrutiny. More than a few investors have called BYND a bubble. While the opportunity for plant-based “meat” seems large, Beyond Meat doesn’t have that opportunity to itself. Impossible Foods, Nestle (OTCMKTS:NSRGY) and Tyson Foods (NYSE:TSN) are among those targeting the market.
All that said, there is real value here — and a real company. Growth has been explosive. Distribution continues to expand. And Beyond Meat is not a play for vegans or for health-conscious customers, but rather traditional meat eaters looking to minimize their environmental footprint or simply replace meat once or twice a week.
Beyond Meat is likely to grow for years to come — the question, at above $150, is whether it can grow fast enough to support an enormously hefty valuation.
As of this writing, Vince Martin has no positions in any securities mentioned.