As we look back on the year, one group of stocks that both worked and didn’t work in 2019 — depending on your time-frame — were Initial Public Offering (IPO) stocks.
In the first half of 2019, IPO stocks could do no wrong. Led by multiple blockbuster IPOs that significantly exceeded expectations, the Renaissance IPO ETF (NYSEARCA:IPO) rose more than 40% from January though July 2019.
Then, things started to cool. The hype surrounding these freshly public, hyper-growth companies started to fade. Investors started to realize that they all aren’t destined to take over the world.
From the end of July to early October, the Renaissance IPO ETF dropped more than 15%.
IPO stocks have since rebounded from the selloff, and today, the group is up an impressive 31% year-to-date. But, not all IPO stocks bounced back in November. Instead, many headline IPO stocks are still losing altitude after a red-hot start in public markets.
Which IPO stocks are those? And, more importantly, is their persistent weakness a buying opportunity? Or will they remain weak into 2020?
Let’s answer those questions by taking a deep look at five IPO stocks that are still losing altitude.
IPO Stocks Losing Altitude: Revolve (RVLV)
Percent Off High: 59%
Why It Has Crashed: Shares of online specialty fashion retailer Revolve (NASDAQ:RVLV) have plunged nearly 60% over the past several months amid concerns that this company may not actually be the future of retail. That is, Revolve hit the public markets with a huge splash on the premise that they were redefining the way consumers shopped. They were creating a fashion brand designed for the digitally connected millennial and Generation Z consumer. But, the reality is that all Revolve did was create a fashion brand build on the back of influencer culture on social media.
That culture has lost steam over the past few months, as consumers have started to realize it’s mostly just smoke and mirrors. As that culture has lost steam, Revolve’s revenue growth rates have slowed. Entering 2019, this was a 23% revenue grower. Exiting 2019, Revolve will be a mid-teens revenue grower. At the same time, gross margins have started to flatten out, while the company hasn’t been able to turn big revenue growth into positive operating leverage (because they have to keep spending big to stay relevant in a competitive retail world).
As growth has slowed and margins have stagnated, RVLV stock has sunk.
Where It’s Going Next: Revolve stock will likely bounce back in 2020. But the rebound won’t come anywhere close to making up for the 2019 selloff. That’s because in early 2019, RVLV stock was trading at a premium valuation that was justified only if the company maintained huge growth for a lot longer.
They won’t, mostly because big growth was a “flash in the pan” during the height of influencer culture. Now that this culture is fading, Revolve’s growth rates will normalize lower.
Still, RVLV stock is undervalued here even for a low-growth retail company with healthy margins– just not by much. So, in 2020, expect a slight rebound here — and not much more.
Beyond Meat (BYND)
Percent Off High: 66%
Why It Has Crashed: Shares of alternative meat producer Beyond Meat (NASDAQ:BYND) have crashed nearly 70% over the past few months for one very simple reason: valuation. It pays to remember that Beyond Meat’s IPO price was $25 per share. Less than four months later, this was a $240 stock. Sure, some of that huge pop was warranted because the plant-based meat craze went viral. But, almost a 10x increase in price in less than four months? That’s too much.
The market quickly realized the rally was overdone. Breaking the hype train was a secondary offering, followed by the lock-up expiration. Those two non-fundamental catalysts caused BYND stock to tumble from $240 to just over $70 in a hurry.
Where It’s Going Next: Beyond Meat stock will bounce back in a big way in 2020. It is important to note that the fundamentals here remain rock solid. Characterized by huge growth and significant margin improvement, second- and third-quarter numbers were very strong. Recent weakness in BYND stock, then, has nothing to do with the fundamentals. It has everything to do with temporary phenomena, like the lock-up expiration.
Those temporary optical headwinds will pass in 2020. The underlying strong fundamentals will persist, as Beyond Meat continues to drive huge growth through retail market expansion. This favorable dynamic of strengthening fundamentals and easing headwinds will converge on what is now a relatively discounted valuation in BYND stock, and that convergence will likely produce a huge rebound in rally in 2020.
Uber (UBER)
Percent Off High: 37%
Why It Has Crashed: Unlike many of the other IPO stocks on this list, ride-sharing giant Uber (NYSE:UBER) never had its day in the sun. The Uber IPO was a flop. Uber stock failed to close above its IPO price on its first day of trading. Ever since, all shares have done is tumble lower. Today, Uber stock trades hands at just under 40% below its high price.
At issue, Uber’s growth trajectory is slowing rapidly, while the margin profile is not improving rapidly. This ugly combination has investors questioning whether or not Uber has enough growth firepower to turn today’s huge losses into profits. Because a stock trades on its long-term profit outlook, UBER stock has tanked as clouds have formed around its long-term profit growth outlook.
It also doesn’t help that Uber was very richly valued to start off with, or that regulatory pressures on the company have escalated over the past few quarters. Nor does it help that the company’s self-driving initiatives seem to be making minimal progress relative to peers in the space.
Where It’s Going Next: I think UBER stock can rebound in 2020. By my numbers, shares are dramatically undervalued, given that the global ride-sharing market is still in its infancy. Uber is still relatively early in building out other verticals like food delivery and freight, and the company’s margins — while not good enough to produce a profit — are improving with scale.
The problem, though, is that the Uber growth narrative has been so bad for so long, that UBER stock needs a hugely positive catalyst to fix this undervaluation. Yet, there is no such catalyst on the horizon.
As such, while I think Uber stock can rebound in a big way in 2020, I’m patiently waiting for a catalyst to show up to save the day. Until it shows up, the safest place to hangout here is on the sidelines.
Pinterest (PINS)
Percent Off High: 48%
Why It Has Crashed: Shares of visual-search platform Pinterest (NYSE:PINS) have lost just under half of their value over the past few months amid concerns that the company’s still very young digital ad business is already slowing down at a worrisome rate.
With Pinterest, you have a big social media platform with a ton of users. They are still in the early days of rolling out digital ads across its platform to monetize those users. At first, that digital ad business was ramping with great pace. We are talking steady 50%-plus revenue growth over the past two-plus years. But, last quarter, Pinterest reported its first-ever sub-50% revenue growth quarter in a sign that growth is slowing. What’s worse? The guide called for revenue growth to slow just over 30% next quarter.
Investors freaked out at the alarming growth slowdown, and as they did, PINS stock plunged.
Where It’s Going Next: PINS stock has huge rebound potential in 2020. Volatility is par for the course in early stage businesses. Revenue growth rates won’t be linear, they will be choppy. That’s what you are getting with Pinterest right now — chop in the revenue growth trajectory.
But, in the big picture, this is a huge social media platform serving a very specific and necessary niche in the crowded internet landscape. The platform has a ton of users, those users are under monetized relative to other internet platforms and ads make sense on the Pinterest platform because it is already a feed of suggested products and services.
As such, the long-term growth trajectory for Pinterest remains favorable. Near-term chop will phase out in 2020. Big revenue growth rates will come back into the picture, and as they do, PINS stock will bounce back.
Lyft (LYFT)
Percent Off High: 40%
Why It Has Crashed: Shares of ride-sharing company Lyft (NASDAQ:LYFT) have plunged around 40% over the past few months for the same reasons that shares of its big brother, Uber, have fallen nearly 40%.
That is, Lyft’s growth trajectory is slowing rapidly, as ride-sharing market tailwinds have eased. At the same time, margins aren’t improving rapidly because the ride-sharing landscape remains fiercely competitive. So, investors are stuck with a company that is running up huge losses, and that company lacks a clear path towards profitability. That’s not a winning combination.
Throw in regulatory pressures and a hyper-rich valuation, and it’s no wonder that LYFT stock has collapsed over the past few months.
Where It’s Going Next: Much like Uber stock, Lyft stock is undervalued here, so shares do have healthy rebound potential in 2020. But, the stock lacks a clear catalyst to turn the depressed narrative around.
Having said that, LYFT stock looks better than UBER stock for one very simple reason — Lyft’s growth rate are slowing by a lot less, whereas Uber’s growth rates are dramatically decelerating. That is, it increasingly appears that Lyft continues to steal market share from Uber. So long as this remains true, LYFT stock has bigger (and more likely) rebound potential than peer UBER stock.
As of this writing, Luke Lango was long BYND and PINS.
