2019 was supposed to be a big year for investors looking for initial public offerings (IPOs) to buy. Instead, it turned into a significant disappointment.
The class of newly public companies of course was headlined by ride-hailing giants Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). But both stocks struggled immediately, and trade below their initial offering price. Furthermore, the likes of Pinterest (NYSE:PINS) and Chewy (NYSE:CHWY) still sit below their first-day close. And, WeWork never even made it to the market after its failed offering led to thousands of layoffs and a cataclysmic shift in its business model.
To be sure, there have been some winners. Luckin Coffee (NASDAQ:LK) and Beyond Meat (NASDAQ:BYND) have soared, for example. But overall, early trading has disappointed. As the Wall Street Journal noted in December, the average 2019 tech IPO rose just 8%. That figure was a massive disappointment given hopes for a record amount of offerings and demand. New issues posted a noted underperformance against a 35% increase in the NASDAQ Composite.
In the wreckage, however, there are some potential sources of value. Some of the so-called “busted IPOs” — generally speaking, a stock that trades below the price initially offered — still have real potential.
That said, these three stocks all were hot IPOs to buy at the time they went public; Yet, they trade below their initial price. It’s possible, if not likely, they’ve been brought down by the broader disappointment toward new issues — and thus have a path to upside once the proverbial smoke clears. Could 2020 be the year for IPOs? Let’s dive in.
Busted IPOs to Buy: SciPlay (SCPL)
SciPlay (NASDAQ:SCPL) held its IPO last year as part of a spin-off from casino supplier Scientific Games (NASDAQ:SGMS). SciPlay is the social gaming arm of SciGames, offering casino-themed games primarily for mobile devices.
Investor interest dissipated quickly. SciPlay priced its shares at $16, and traded as high as $18.75 on its first day of trading. But by the end of that session, shares were at $15.25, and by late August they were below $10.
However, SCPL has rallied to right near $11.50, and there’s a nice case for a rebound. Social gaming has proven a surprisingly profitable and consistent business, particularly on the casino side. Valuation is also more than reasonable, as SCPL trades at less than 13x 2020 consensus earnings per share estimates.
There’s basically one question here: is SciPlay something closer to Zynga (NASDAQ:ZNGA), or to Glu Mobile (NASDAQ:GLUU)? Zynga has executed an impressive turnaround with some help from its own slot products. Glu Mobile, meanwhile, has been a serial disappointment — including a 50%-plus haircut last year after consecutive earnings misses.
Overall, SciPlay has a chance to re-inspire investor confidence, which suggests it should at least challenge the $16 price investors were willing to pay as it went public.
The RealReal (REAL)
Luxury goods reseller The RealReal (NASDAQ:REAL) might have gone public a year too late. Investor patience for unprofitable yet high-growth companies faded in 2019, as seen with Uber, Lyft, and even cannabis names like Canopy Growth (NYSE:CGC).
As a result, REAL stock has struggled. Shares are down around 23% from the IPO price of $20, and off by almost half from a brief early high above $30. However, like SCPL, I’m not sure investors can write the company — or the stock — off so quickly.
After all, The RealReal has an intriguing model — and has posted impressive top-line growth. Revenue should grow at least 40% in 2019, with analysts looking for another 32% this year. Profitability hasn’t arrived yet, but like many e-commerce players, The RealReal is investing heavily in customer acquisition. In the company’s latest quarterly filing, spending was up on near-term promotions and marketing that hopefully will yield long-term returns.
This seems simply like a better story than investors are giving it credit for. To be sure, as I wrote this summer, investors need to trust the business model. Competition from the likes of Farfetch (NYSE:FTCH) needs to be monitored as well, but this is a fast-growing company at a reasonable price-sales multiple near 4x. That was enough for upside in the past, and it might be again in the future.
Slack Technologies (WORK)
That technicality aside, WORK stock has been one of the worst new issues of the past year. Shares now have been halved from their highs. Furthermore, competitive pressure from Microsoft (NASDAQ:MSFT) Teams and a still-high valuation have led investors to flee.
However, as I’ve said previously, the stock can’t be written off just yet. Slack still has an enormous market opportunity. Growth remains impressive, with revenue rising 60% year-over-year in the third quarter and a guided 55-56% for the full year. There’s even some technical reason for optimism, given that support seems to be holding at current levels.
As with many other 2019 IPOs, investors have to be patient. Slack is still running operating losses, but this was one of the most-anticipated growth IPOs of last year. That said, it’s difficult to believe the story has changed this much in such a short period of time.
As of this writing, Vince Martin is long shares of Chewy. He has no positions in any securities mentioned.