There’s a joke in trading circles that while IPO means “initial public offering,” the true investment interpretation is “it’s probably overvalued.” The logic is simple. There’s a bunch of money in Silicon Valley right now that is hyping up rapidly growing tech companies. All this money is looking for a exit. A good way to exit? An IPO. The best way to exit? An IPO with a big price tag, so all the money in Silicon Valley can exit with huge returns, while public market investors have to deal with the valuation headaches down the road.
This is more than just a theory. A recent joint economic study authored by Will Gornall from the University of British Columbia and Ilya A. Strebulaev of Stanford University looked at the valuations for 135 tech “unicorns” — or private tech companies that have at least a $1 billion post-money valuation. The study found, using rigorous valuation models, that the average unicorn is overvalued by roughly 50%.
This overvaluation doesn’t necessarily mean IPO stocks can’t go higher. It just means IPO stocks are extra volatile. That is, when times are good and investors adopt risk-seeking attitudes, IPO stocks can outperform in a big way since overvaluation isn’t a huge concern (the idea is that these companies can grow into their valuations in an “everything goes right” scenario). But when times are bad and investors seek risk-protection, IPO stocks can under-perform in a big way since overvaluation does become a huge issue.
Just look at the Renaissance IPO ETF. From Christmas Eve 2018 to late July 2019, the ETF soared more than 50%. But since late July 2019, the ETF has shed nearly 20%.
The investment implication? IPO stocks aren’t for the faint of heart. But they are worth watching. Especially when a company that comes along represents a “keystone” technology. These keystones aren’t easy to find, however. They’re meant to spark the next industrial revolution, which isn’t an easy feat for just any company. Many of these growth companies do represent the future, and could fly higher in the long run.
Pinterest (PINS)
IPO Date: April 2019
Performance from IPO Price: +40%
Social media company Pinterest (NYSE:PINS) was one of the most highly anticipated IPOs of 2019, and thus far, PINS stock has lived up to the hype. Pinterest had a big first day on Wall Street, and while trading has been highly volatile ever since, the stock is still up 40% from its IPO price as investors have expressed broad optimism with respect to the company’s efforts to scale what is still a very small digital ad business across a very large and global user base.
Venture capitalists put a lot of money behind Pinterest when it was still a private company, and for good reason. Investing at an early stage can net gains upward of 3,000%, or even 30,000% in rare cases. No wonder Matt McCall, a legendary tech investor in his own right, calls them “the grand slam home run hitters of the investment world.” The same is true of keystone technologies. All you need is to be right once and you’re set for life.
PINS stock is important to watch in the long run because this company gives clues as to how the rest of the digital ad market — Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) — is doing. Long story short, the digital ad market is dominated by those three titans. But there are a few startup digital ad businesses in the mix that could pose a challenge. One of the main challengers is Pinterest. Thus, if Pinterest does well in the long run, that could be a sign that the multi-hundred billion dollar digital ad market is decentralizing, not consolidating. The opposite is true, too.
Where is PINS stock going next? I think higher. Recent weakness in the stock is overdone. This company continues to add users in droves, the ad business is ramping with exceptional pace, and the company has a clear runway to scale margins tremendously over the long run, given the high margin precedents across the digital ad world. As such, the fundamentals here are rock strong. The stock has been weak. This disconnect ultimately creates a good buying opportunity.
Uber (UBER)
IPO Date: May 2019
Performance from IPO Price: -33%
Arguably the most anticipated and unarguably the biggest IPO of the year, that of ride-sharing giant Uber (NYSE:UBER), has been a total flop. Uber stock failed to close above its $45 IPO price on its first day of trading, and has since spent very little time above that IPO price. Instead, the stock has sold off dramatically from those levels as investors have expressed concerns with regards to slowing growth and widening losses. UBER stock presently trades more than 30% below its IPO price.
Nonetheless, UBER stock is important to watch for the long run because it is the poster boy for the “growth at all costs” model which Amazon pioneered over the past two decades. This model is simple. Don’t worry about margins during the growth era. Just focus on growth, and do whatever it takes to win majority market share. Once the growing stops, leverage your size to expand margins, and product huge profits at scale. It worked for Amazon. Uber hopes it will work for them, too. But investors are being impatient — and this impatience could broadly pressure this entire “growth at all costs” model, which could be bad news for other growth IPOs in the pipeline.
Where does UBER stock go next? In the near term, tough to tell. The optics are bad, and investors seem hesitant to provide buying support, so it’s unlikely this stock stages a near term rally. But in the long run, UBER stock should head higher. I don’t think the “growth at all costs” model is done — it remains supported by exceptionally low rates which add value to future profits and detract value from present profits. Uber also runs on a liquidity network (more drivers leads to lower wait times and fees which leads to more riders and higher earnings opportunities and therefore more drivers), so holding majority market share is a long term win for this company.
Luckin Coffee (LK)
IPO Date: May 2019
Performance from IPO Price: +10%
One of the lesser known yet still very important IPOs of 2019 was that of China coffee retail company Luckin Coffee (NYSE:LK). The Luckin IPO hasn’t been a huge success. But it hasn’t been a flop either. From its $17 IPO price in May 2019, LK stock has rallied about 10% as investors have been cautiously optimistic with regards to this company’s long term potential in China’s coffee retail market.
LK stock is important to watch in the long run because this company’s performance will give insight into the competitive dynamics between U.S. and Chinese companies in China. That is, U.S.-based coffee retail giant Starbucks (NASDAQ:SBUX) is the big coffee player in China, too, with a rapidly expanding presence. Luckin is a China-based coffee retail giant with a more rapidly expanding presence in China. Pretty soon, these two companies will start rubbing elbows aggressively with each other. Who will win? The answer to that question will provide important implications for other companies competing with overseas rivals.
Where does LK stock go from here? I’m bullish, so I think higher. Luckin employs a unique coffee retail model that is built for digital era consumers. You order your coffee drink online through a mobile app, and then walk into a tiny “pick-up-only” Luckin store a few minutes later, grab your drink (which is already made), and go about your day. Essentially, it’s an on-the-go, mobile-centric coffee retail model which leverages technology to maximize consumer convenience. That’s a winning process, and Luckin should be able to leverage this winning process to drive huge growth in China’s coffee retail market in the long run — and all that growth should power LK stock higher.
Beyond Meat (BYND)
IPO Date: May 2019
Performance from IPO Price: +500%
The hottest IPO of the year — and of this decade — has been that of plant-based meat producer Beyond Meat (NASDAQ:BYND). The leader in plant-based foods priced its IPO at $25 per share. Today, the stock trades at $150, up a whopping 500% over the past few months as investors have grown increasingly bullish on secular plant-based food adoption trends.
In December 2018, Matt McCall included BYND stock in his top 10 predictions for 2019.
“Prediction #10: Fake is Good News in 2019: Meat alternative company, Beyond Meat, has filed to go public. Also, be on the lookout for synthetic diamonds to take over the diamond industry. Both are exactly what millennials are looking for as they upend two traditional industries. And I have to say I am a fan of them!”
Learn what Matt thinks will drive investment dollars through the rest of 2019 and beyond.
It is important to watch BYND stock for one simple reason — this company is an indicator of the huge plant-based food trend. Broadly speaking, plant-based foods are on the up and up thanks to ground-level consumer trends, such as a desire to reduce carbon emissions, be more animal friendly, and eat healthier. Right now, this trend is all the craze. But how long will it last? Will plant-based foods actually uproot the entire foods industry? Or is this just a flash in the pan? Beyond Meat’s journey will answer all of those questions, and those answers will have huge implications across the global food economy.
Where does BYND stock go from here? In the long run, higher. Plant-based foods are the future. Today’s ground-level consumption trends are simply too strong, too real, and too deep-rooted to reverse course anytime soon. As such, plant-based food adoption will continue on a secular growth trajectory for a long time. As it does, Beyond Meat will maintain leadership in the space through product innovation, big vendor partnerships, and strong brand equity — all together implying that Beyond Meat will grow by leaps and bounds over the long run with the plant-based foods industry. All that growth will power BYND stock higher in the long term.
Slack (WORK)
IPO Date: June 2019
Performance from IPO Price: -15%
Alongside Uber, another highly anticipated IPO this year which has ultimately turned into a flop is that of enterprise communication platform Slack (NYSE:WORK). Slack had a big first day on Wall Street, opening up more than 50% above its initial IPO price. But ever since, shares have been stuck in a multi-month downtrend as investors have grown weary of the valuation. Today, WORK stock trades about 15% below its June 2019 IPO price.
WORK stock is important to watch in the long run because this company’s journey ultimately has huge implications for the very large enterprise communications world. Long story short, Slack wants to be the new all-in-one enterprise communication tool. No more texting. no more emailing. Slack wants all enterprise communications to happen through its platform. If the company achieves this goal, that ultimately means a ton of growth for Slack in the long run, and huge losses for current enterprise communication titans.
Will the company achieve this goal? In part, yes. I don’t think Slack has the potential to disrupt email flows everywhere — for some, email is a deeply embedded part of their workflow, and disrupting it won’t happen until those people phase out of the workforce. But for others, Slack is the de facto form of enterprise communication, and within this demographic, Slack does have a unique opportunity to become an all-in-one enterprise communication tool. If they do that, Slack will continue to grow at a robust pace in the long run. At one point in time, that robust growth was priced into WORK stock. That is no longer true today, implying that recent weakness is a solid buying opportunity.
Datadog (DDOG)
IPO Date: September 2019
Performance from IPO Price: +20%
One under-the-radar IPO which has had tremendous success amid recent IPO weakness is that of SaaS analytics platform Datadog (NASDAQ:DDOG). Datadog priced its IPO at $27 in September 2019, amid what was a big sell-off across all IPO stocks. Despite the sluggish IPO backdrop, Datadog’s IPO did really well, and DDOG stock has held onto most of those gains ever since. At present, DDOG stock trades 20% above its $27 IPO price.
Datadog is an important company to watch in the long run because this company is immersed in what many consider to be one of the biggest secular growth narratives of the next decade — the rise in the data economy. That is, enterprises everywhere are realizing how useful data is in making business decisions of all sorts, from product creation to marketing. Consequently, enterprises everywhere are doing all they can to collect, store, and analyze data, so as to glean valuable insights from that data and make optimal data-driven business decisions. Datadog helps companies do this, and if Datadog stays on its red hot growth trajectory, that’s a sign that this data economy remains on solid footing. If Datadog’s growth trajectory starts to flatten out, the opposite could be true.
Where will DDOG stock head next? Higher. The data economy in on solid footing, and will remain on solid footing for a long time. Data is the future of everything because it enables everyone to make better decisions. The volume of data globally is growing at an exponential rate, so the volume of spend that goes into analyzing all that data will similarly grow at an exponential rate. As the data spend pie grows, Datadog will grow, too, and DDOG stock will head higher.
Zoom Video (ZM)
IPO Date: April 2019
Performance from IPO Price: +110%
Last, but not least, on this list of important IPO stocks to watch is video conferencing company Zoom Video (NYSE:ZM). Much like the Beyond Meat IPO, the Zoom Video IPO has been a huge success. ZM stock opened up big on its first day of Wall Street. It has remained largely hot ever since. From it’s $36 IPO price back in April 2019, ZM stock is up more than 110%.
Zoom Video is an important company to watch in the long run because its success will be indicative of the pervasiveness and strength of the video mega-trend. Video communication is on the up and up. Some believe it will become the de facto form of communication, ultimately replacing audio. If this happens, Zoom Video will turn into a very important and irreplaceable piece in the enterprise communication world, while current enterprise audio communication companies could slide into irrelevance.
Will this happen? Will ZM stock zoom higher in the long run as video replaces audio? I’m not so sure. Video is more intrusive than audio. A lot of people don’t like putting their faces on a computer for others to see. Because of this, it’s tough to see video replacing audio in all instances. Instead, as video gets better, it will become more prevalent — but never outright replace audio. In this sense, Zoom’s growth prospects in the long run are good — not great. Unfortunately, ZM stock is priced for great, and that could create valuation friction for this stock in the near to medium term.
As I mentioned throughout this article, Matt McCall’s keystone technology thesis is a logical next step for growth-seeking investors.
Matt’s belief is that 5G will power a tectonic shift in the way global society interacts with technologies, including a $19 trillion industry. If you want to invest in the Internet of Things, you have to invest in 5G. If you want to invest in self-driving cars, you need 5G. Artificial intelligence? 5G. The list goes on and on.
5G is a crucial component — a keystone technology — that will unlock billions of dollars of value and innovation.
To teach investors his secret for investing in this keystone, Matt wrote a lengthy essay explaining exactly how he does it. No tricks, just thoughtful advice that all investors should read.
As of this writing, Luke Lango was long PINS, FB, GOOG, AMZN, LK, and BYND.
