Investors are often quite enthusiastic about initial public offerings (IPOs). Call it the law of shiny new objects, but not all newly public companies are worth investors’ trouble. In fact, there some upcoming IPOs investors ought to sell.
Simple math dictates that not all new stocks will be immediate winners. In the just-completed third quarter of 2020, there were 81 IPOs raising a combined $28.5 billion, marking the busiest July through September stretch since the dot-com era.
What makes IPO even more confounding for many do-it-yourself investors is that so many newly public companies, regardless of underlying fundamentals and quality, rally immediately following their debuts only to later succumb to selling pressure at hands of total addressable market concerns, profitability woes and lockup expirations, among other factors.
Here are 3 upcoming IPOs that will land with a thud:.
- Golden Nugget Online Gaming
There’s already plenty of hot air in the Airbnb balloon. The company that allows homeowners and landlords to play hotelier recently filed for a $3 billion IPO that values the company at $30 billion. Alone, that’s not a red flag, but there are in fact red flags.
Assuming the $30 billion valuation comes to pass and that the requisite first day surge occurs, Airbnb would likely conclude its first day as a public company with a market capitalization in excess of Marriott International’s (NYSE:MAR).
That’s not the only cause for alarm. Airbnb was valued at $18 billion in April, meaning that in six-month span in the midst of a pandemic that’s punished global travel, somehow, a travel company saw its value appreciate two-thirds. An independent analysis of Airbnb turns up a $21 billion valuation.
Additionally, the company burned through $1.2 billion over 2019 and the first half of this year and it recently raised $2 billion via equity and debt sales, the latter of which was classified as a high-interest junk bond.
Here’s the deal. Airbnb does qualify as “disruptive” and it one day may be a fine stock to own, but where’s the wisdom in owning a company that’s barely profitable in a beleagured industry with little visibility as to when a Covid-19 vaccine is coming to market?
Golden Nugget Online Gaming (GNOG)
In the essence of accuracy, Golden Nugget Online Gaming (GNOG) technically is public because the special purpose acquisition company (SPAC) acquiring the gaming entity, Landcadia Holdings II (NASDAQ:LCA), is already public. However, GNOG hasn’t yet debuted in official form. That was supposed to happen in the third quarter, but didn’t.
To be fair, GNOG is being valued at $745 million, or just 6.1x next year’s expected revenue. That’s quite palatable, particularly when compared to the aforementioned Airbnb. SPAC ties and valuation aren’t the issues with GNOG.
Rather, what investors need to be concerned with are total addressable market (TAM) and whether enough states legalize online casinos to lift iGaming TAM to the heights some analysts are forecasting. Recent price action in LCA stock — falling 13% last week — suggests some skittishness regarding the GNOG IPO.
More importantly, GNOG is currently operational only in New Jersey, where the company turns a tidy profit. It’s aiming to soon be live in Michigan, but the current internet casino landscape in the U.S. is sparse and there are no guarantees more states, including big kahunas such as California and New York, are going to join the party anytime soon. Nor are there guarantees GNOG, though it’ll try, will procure licenses in each state that joins this party.
Out of the gate, GNOG has IPO-to-sell potential on the basis that iGaming needs more concrete, state-level validation. As the company matures, it could be worth investors’ capital, but they don’t need to run in on day one.
Of the three companies mentioned here, I’m willing to go on record saying that Chinese fintech firm Lufax could be the best IPO performer. Expected to trade under the ticker “LU” on the New York Stock Exchange, Lufax could raise up to $2.36 billion if its offering comes in at the the high end of the expected range.
The concern with Lufax isn’t structural, but rather just how much Ant Group’s upcoming IPO will overshadow its rival. Between dual listings in Hong Kong and Shanghai, Ant Group is going to raise about $35 billion in what’s one of the most ballyhooed fintech IPOs in some time. Ant Group could be valued at $314 billion, far north of Lufax, and enough to steal some thunder from its smaller competitor.
Lufax has some fine traits to offer investors. It’s one of the biggest peer-to-peer lenders in China and is evolving, as so many fintech companies do, to offer retail lending and wealth management.
Additionally, Lufax is listing in the U.S., which Ant Group isn’t doing. That could help the former drum up some interest, but investors can afford to exercise some patience with this one, particularly at a time of strained U.S./China relations.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.