It’s been a good year for IPO stocks.
The first eight months of 2019 have seen 107 IPOs priced, down about 20% from the same period last year. However, the total proceeds raised add up to $42.5 billion, 23% higher than in the first eight months of 2018.
For example, SmileDirectClub, the company that provides in-home teeth straightening at a fraction of the cost, filed its preliminary prospectus Sept. 3. It expects to raise up to $1.3 billion in its IPO selling 58.5 million shares at between $19 and $22 a share, valuing the company at a jaw-dropping $3.2 billion.
Generally, it’s been a seller’s market, so you would think there wouldn’t be any stinkers.
Despite a relatively healthy IPO market that’s produced an average return of 33% year-to-date through Sept. 3, almost double the S&P 500, several IPOs have wet the bed.
Here are what I believe are seven of the worst IPOs in 2019.
The Worst IPO Stocks: The We Company (WE)
The first of my worst IPO stocks in 2019 is The We Company, the holding company for office co-working giant WeWork, which currently has 528 locations in 111 cities across 29 countries.
Its growth since opening its first location in New York City in early 2010 is mind-boggling. That’s the good news. The bad news is that WeWork may never make money.
“On the key question of future profitability, it is impossible to tell if WeWork’s costs will continue to be double its revenues, or if the per-unit trends justify additional investment,” wrote Financial Times contributor Rett Wallace Sept. 3. “Investors relying on the prospectus may have trouble telling what gets more elevated, their consciousness or their blood pressure.”
WeWork has yet to price its shares, but the cynicism facing this IPO suggests it will be nearly impossible for it to come out of the gate with a positive first-day return.
In addition to the fact it loses money, has a nosebleed valuation and relies heavily on CEO and founder Adam Neumann, is the presence of a three-class share structure that will make it virtually impossible for institutional investors to exert any pressure on the company should it continue to lose money for an extended period.
While it’s not uncommon for tech companies to have a dual-class share structure in place to ensure the founder can maintain a long-term vision, a three-class share structure takes the cake.
It hasn’t gone public yet and already it has to be considered one of the worst IPOs of 2019.
Peloton, which filed its preliminary prospectus Aug. 28, considers itself to be a technology company that happens to sell interactive fitness machines.
In addition to being a technology company, it believes itself to be a media company, an interactive software company, a product design company, a social connection company, an omni-channel retail company, an apparel company and a logistics company.
That’s like RCI Hospitality Holdings (NASDAQ:RICK), which operates a chain of strip clubs under the name Rick’s Cabaret, calling itself a tech company, because, in addition to operating nightclubs, it also operates more than a dozen websites.
In a nutshell, Peloton is a company that sells fitness bikes and treadmills between $2,245 and $4.295. Also, it streams classes for these machines for a monthly subscription of $39.
In fiscal 2019, it generated $719 million in revenue from the sale of fitness products and $181 million in sales from monthly subscriptions. Including $14.7 million in other revenue, fitness product sales have gone from 84% of its total revenue in fiscal 2017, to 79% in the past year with most of the gains from its monthly subscriptions.
Its gross profit margin for fitness products and the monthly subscriptions are 42.9% and 42.7% respectively.
However, much like Wayfair (NYSE:W), it has to spend a boatload on marketing to attract and retain customers. As a result of these acquisition costs, Peloton lost $195.6 million before tax in 2019, almost three times what it lost in 2017.
Just have a look at Nautilus (NYSE:NLS) to understand the risks of investing in fitness equipment. You’re far better to invest in Apple (NASDAQ:AAPL) and ride its growth in wearables.
Peloton is most likely going to be a dud.
Luckin Coffee (LK)
Luckin Coffee (NASDAQ:LK) is China’s fastest-growing coffee chain in terms of the number of stores open and cups of coffee sold. It went public May 16 at $17 a share, generating a 19.9% first-day return. Since then, LK stock has gone sideways.
They say that you can often pick up an IPO stock for less than its initial pricing within 12-24 months. I have no doubt Luckin is in that category. It’s been terribly over-hyped.
In mid-August, Luckin reported its first earnings report as a public company. Its results were much worse than expected, sending its stock down by more than 15%.
How bad were its second-quarter 2019 results?
Luckin was expected to lose 43 cents per share. It lost 48 cents or $49.6 million on $132.4 million in revenue. That means it loses 37 cents for every dollar in sales. In April, Starbucks (NASDAQ:SBUX) CEO Kevin Johnson called Luckin’s heavy discounting “unsustainable.”
Furthermore, while Luckin has only been in business for two years in China, Starbucks has been operating there for the past 20 years and has almost 4,000 stores.
As Starbucks plays the long game in China, it has both the experience and financial wherewithal to wait out Luckin.
Luckin’s IPO is an example of how alluring China is to North American investors. Eventually, that’s going to come back to haunt them.
Wanda Sports Group (WSG)
If you’re a triathlete, you’ve probably familiar with China-based Wanda Sports Group (NASDAQ:WSG), a global sports events, media and marketing platform that owns the Ironman triathlon brand.
In late July, WSG went public at $8 a share, raising $190 million by selling 23.8 million shares of its stock. Its stock lost 35.5% on its first day of trading and it’s flatlined ever since.
WSG is a spinoff of Dalian Wanda Group, the privately held holding company of Chinese billionaire Wang Jianlin, who also owns a controlling interest in AMC Entertainment (NYSE:AMC). Jianlin initially thought Wanda Sports could raise more than $500 million from its IPO. Unfortunately, WSG went public below its IPO target price of $9-$11.
Chinese IPOs, in general, have done poorly in 2019. As of the end of July, 11 of the 18 Chinese IPOs this year were trading below their IPO price. WSG is one of those 11.
Unlike many IPOs in 2019, Wanda Sports makes money. In 2018, it earned $61.9 million in net income from $1.3 billion in revenue. That’s a net margin of just 4.8%, not much better than a grocery store chain.
If you are a triathlon athlete, it’s probably better to invest in yourself and not the owners of the Ironman. You’ll be better for it.
Greenlane Holdings (GNLN)
Greenlane Holdings (NASDAQ:GNLN) is a leading distributor of vaporization products and consumption accessories in the U.S. and Canada. Its biggest claim to fame is that it distributes Juul and Pax vape pens, two of the biggest manufacturers of vaporizers in the world.
That was enough to sell 6 million shares of its stock in April at $17 a share, above the high-end of its pre-IPO pricing. As a result, its stock gained 24% in its first day of trading. However, since then, it’s fallen to just under $6, prompting the threat of class-action lawsuits by lawyers across the country who believe the company made several untrue statements in its IPO prospectus.
In its Q2 2019 earnings report, Greenlane reported $102.9 million in revenue and a net loss of $21.0 million. On an adjusted basis, it lost $2.6 million in the first six months of the year, a significant decline from a $3.1 million gain a year earlier.
On Aug. 8, Greenlane announced that it had signed a deal with Canopy Growth (NYSE:CGC) to be the exclusive distributor of the cannabis company’s Storz & Bickel vaporizers.
This piece of news has done nothing for Greenlane.
The reality is that Greenlane’s inventories are growing three times as fast as its sales, which suggests that its ties to cannabis are dubious at best.
In one of the most highly anticipated IPOs in several years, Uber (NYSE:UBER) went public in May at $45 a share, raising $8.1 billion in the process.
As I write this, it is trading around $31 a share, 32% below its IPO price.
Time to buy? Not by a long shot. Likely, Uber will never make money.
In May, just before its IPO, I recommended that investors wait six months before buying its stock to see how it trades. Well, almost four months have passed and nothing good has happened to suggest now is the time to buy.
In its first quarter as a public company, Uber reported a GAAP loss of $5.24 billion with about $3.9 billion due to share-based compensation. On a non-GAAP basis, the ride-hailing app’s adjusted earnings before interest, taxes, debt and amortization (EBIDTA) loss in Q2 2019 was $656 million, 125% higher than a year earlier. Not quite as bad as $5.24 billion, but still a massive loss for a single quarter.
That’s especially true when you consider that Uber can do very little to ward off the competition.
“If I look down at my phone I’ve literally got six ride-hailing apps on there, and five bike-sharing apps, and drivers are the same — they’ll just go with whoever is busy or wherever they can get the peak pricing,” said Aaron Shields, executive strategy director at FITCH, a retail brand consultancy. “The competitors on the market are taking advantage of switching costs — they’re dividing up a market and making it more saturated.”
Every time Uber and the rest of the ride-hailing apps does something to reduce costs, growth slows, which makes its business model a big loser.
Levi Strauss (LEVI)
As of Sept. 3, Levi Strauss’ (NYSE:LEVI) shares had lost 0.2% from its IPO price of $17. What makes this so egregious is that LEVI stock gained 32% in its first day of trading, which means it’s lost $228 million of its market cap in the last five months.
In March, before its IPO, I gave InvestorPlace readers seven reasons why they should steer clear of Levi’s stock. It appears that I was right. One of my biggest concerns was the amount of debt it carried on its books.
“Assuming Levi’s goes out at a valuation of $5.78 billion, the company’s long-term debt of $1.1 billion will be 19% of its market cap,” I wrote on March 21. “That’s not a massive amount by any means considering it’s got more than $700 million on its balance sheet, but I can’t help but wonder why it hasn’t paid down its debt over the past four years.”
The other big concern I had about LEVI was its lack of significant growth in Asia.
In the first six months of 2019, Levi’s had Asian revenues of $474.4 million, 7.1% higher than a year earlier. That accounts for just 17% of its global revenue. Now, I get that it’s an iconic U.S. brand, but there are plenty of American brands growing faster in Asia.
I believe that the Haas family picked an ideal time to go public for a company whose best days may or may not be ahead of it.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.