If we look at the general trend in the last few quarters, there has been immense focus on new stocks offered by special purpose acquisition companies (SPACs).
But while SPACs are popular, investors should also pay attention to new stocks that are listed through a traditional initial public offering.
This column will talk about four IPOs in the last six months that are worth considering. These new stocks to buy are from high growth business with secular industry tailwinds.
Let’s take a deeper look into these new stocks.
New Stocks to Buy: Roblox Corporation (RBLX)
Among the recent new stocks from IPOs, RBLX stock has garnered investor attention. Valuations might seem stretched, but the online gaming and entertainment company is on a robust growth trajectory.
For the year, Roblox has guided for revenue of $1.5 billion. This would imply a year-on-year growth of 60% (mid-range of guidance). However, the key factor to note is that Roblox is expecting revenue acceleration in fiscal year 2022. The reason is international expansion. Therefore, it seems very likely that top-line growth will sustain over 50% in the next few years.
From a valuation perspective, the company expects operating cash flow of $330 million for 2021. As daily active users swell with international expansion, it’s likely that cash flows will surge. And so, will free cash flows. The business has the potential to deliver long-term value.
Coming to valuations, RBLX stock is trading at 28x forward sales. However, with strong growth expectations, Stifel has a price target of $85 for the stock. This would imply an upside of 26.3% from current levels.
In February, BMBL stock listed at $70 after pricing its IPO at $43. The stock has remained resilient at higher levels and is attractive among new stocks to buy.
For the fourth quarter of 2020, the company reported total paying users of 2.7 million. This was higher by 32.5% on a year-over-year basis. With average revenue per paying user of $20.20, the company is well positioned for growth and margin expansion.
As the company’s visibility increases, word-of-mouth will accelerate growth in paying users. The marketing expense should decline per paying user and this will translate into higher EBITDA margin.
Furthermore, the company’s Bumble and Badoo app have a combined 40 million monthly active users. With 2.7 million paying users, the company has ample scope to monetize from among current active users.
Another growth trigger for the company is expansion in new geographies. The company intends expansion in Europe, Asia and Latin America. The positive is that there is a big addressable market and paying users are likely to increase at a healthy pace in the coming years. On the flip side, new markets would involve higher marketing expense.
Overall, Bumble is in a business that’s likely to grow irrespective of economic conditions. The company has been generating positive free cash flows, which is likely to increase significantly in the coming years.
New Stocks to Buy: DoorDash (DASH)
After an IPO in December, DASH stock touched a high of $256 last month. However, there is no doubt that valuations were stretched and the stock has corrected meaningfully to $126. I would include DASH stock among the stocks to buy at current levels.
DoorDash is in the business of food delivery and the company’s top-line growth has been stellar. For Q4 2020, the company reported revenue of $970 million, which was higher by 226% on a year-over-year basis. Further, for the period, the company’s adjusted EBITDA margin was 9.7%. I believe that the stock will trend higher if adjusted EBITDA margin expands in the coming years.
In terms of the business potential, DoorDash might continue to report strong top-line growth. The Covid-19 pandemic has accelerated the food delivery business growth and the trend is likely to sustain.
As an example, Chipotle Mexican Grill (NYSE:CMG) reported digital sales growth of 174.1% in 2020 and it accounted for 46.2% of total sales. Estimates also suggest that global delivery sales can increase at a CAGR of more than 20% over the next decade. This provides a big opportunity for DoorDash.
Overall, considering the growth outlook, DASH stock is an attractive name among new stocks. The correction is a good opportunity to consider some exposure.
SNOW stock is from the IPOs of the last quarter of 2020. After touching a high of $429, the stock has slipped to $216. I strongly believe that SNOW stock is among the top new stocks to buy at current levels. Earlier this month, Deutsche Bank upgraded the stock with a price target of $300. This would imply an upside of 38% from current levels.
Snowflake is a provider of cloud-based data platform, which, according to the company, has a market size of $81 billion. The company is on a high-growth trajectory with FY2021 revenue of $592 million, which was higher by 124% on a year-over-year basis.
Revenue growth has been driven by significant addition of new customers and high customer retention. Further, an increase in the number of Fortune 500 customers has supported growth. Even for the current year, the company has guided for revenue growth of 82%.
Investors might therefore question on why the stock has corrected so steeply.
Even as top-line growth remains stellar, the company is still reporting operating level losses. For its last fiscal year, the company reported an operating loss of $544 million. Of course, I expect margins to improve going forward and FCF is likely to turn positive. That will be the key trigger for the next leg of upside for the stock.
There is no doubt that the business has long-term tailwinds and Snowflake has done well in terms of customer acquisition and retention. The current dip is therefore a good opportunity to accumulate the stock.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.