The best time for companies to consider an initial public offering is when investor sentiment is bullish. According to AAII Sentiment Survey, U.S. investor sentiment is 56.9% bullish. This is the highest positive sentiment rating in the last year. It’s therefore not surprising that IPOs have been flooding the market.
A Renaissance Capital report indicates that 102 companies went public in the first quarter of 2021. This was the busiest quarter for IPOs in over 20 years.
At the same time, if we look at Renaissance U.S. IPO Index performance, the index has underperformed in the last three months. However, the IPO Index has delivered returns of 138% in the last year. A key conclusion is that investors need to be more selective amidst a flurry of IPOs.
In 2019, 59 special purpose acquisition companies raised $13.6 billion. Last year, 248 SPACs raised $83.3 billion. In the current year, there are already at 226 SPACs that have raised $73 billion. With a wave of new IPOs and SPACs, investors need to significantly increase their due diligence.
Having said that, as broad market sentiment remains positive, IPOs will continue to provide attractive opportunities. This column will discuss four of the best IPOs of 2021 so far. After a strong listing these IPOs are worth considering for the long-term portfolio.
Let’s talk about the four stocks to buy from the recent IPOs.
- Coursera (NYSE:COUR)
- Coupang (NYSE:CPNG)
- Roblox Corporation (NYSE:RBLX)
- Affirm Holdings (NASDAQ:AFRM)
Best IPOs of 2021: Coursera (COUR)
Coursera’s IPO was priced at $33 and COUR stock is now at $51. After a strong listing, the stock has remained resilient, and I believe that COUR stock is among the top new stocks to buy.
Coursera is among the largest online learning platforms in the world. The company has been on a high growth trajectory and that’s the reason for a strong listing. In 2020, the company reported revenue growth of 59% on a year-on-year basis to $293.5 million. Coursera continue to report EBITDA level loss, but margin has witnessed steady improvement. Given the top-line growth, the company seems positioned to be adjusted EBITDA positive in the next 12 to 24 months.
A key point to note is that the company has a global addressable market. The total registered learners in have swelled from 30.1 million in 2017 to 76.6 million last year. Further, paid enterprise customers were at 387 last year as compared to 240 in the prior year. Importantly, the net retention ratio has been over 100% in the last two years.
Clearly, as registered learners and enterprise customers grow, the company should deliver healthy cash flows. Once the company is free cash flow positive, the valuations will adjust on the upside.
The Covid-19 pandemic has accelerated growth for the company. Some fundamental changes will sustain even after the pandemic and Coursera is likely to benefit. As an example, in 2020 more than 4,000 colleges and universities launched free online learning programs through Coursera.
Overall, Coursera still seems to be at an early growth stage and that makes COUR stock among the top IPOs of the year.
Coupang’s IPO was priced at $35 and the listing was stellar. The stock touched a high of $69 and currently trades at $47. I believe that current levels are attractive for exposure.
Among the dozens of IPOs, Coupang gives investors exposure to an attractive e-commerce market in South Korea. Recently, Goldman Sachs initiated coverage on CPNG stock with a price target of $62. This would imply an upside of 38% from current levels.
Coming to the growth triggers, the total e-commerce market in South Korea was $128 billion in 2019. The market size is expected to reach $206 billion by 2024. Therefore, there is a big addressable market and Coupang seems in a good position to benefit.
Coupang has been reporting accelerating top-line growth. The company’s total net revenue last year was $12 billion, which was higher by 90.8% on a year-over-year basis. Further, the company had an active customer base of 14.8 million.
Cash flow from operations for 2020 was $300 million with a negative free cash flow. If strong top-line growth sustains along with EBITDA margin improvement, the company is poised to deliver healthy cash flows. With economies of scale, the e-commerce business model has proved to be a cash flow machine.
Therefore, CPNG stock is among the attractive stocks to buy from the list of IPOs. The stock can be a potential long-term value creator.
Best IPOs of 2021: Roblox Corporation (RBLX)
Roblox is also among the big IPOs of the year and RBLX stock seems attractive from a medium to long-term investment horizon.
The company’s IPO was priced at $45 and the stock listed at $71. Even with some concerns related to the valuation, the stock has remained resilient and trades at $82.
For the year, Roblox expects revenue of $1.5 billion, which is likely to be higher by 60% (mid-range) on a year-over-year basis. The key point, however, is that Roblox is expanding internationally in regions like western Europe and Asia. With this, the company expects top-line growth to accelerate in 2022 and beyond. Therefore, with the multi-year robust growth outlook, RBLX stock looks attractive.
For the year, the company expects operating cash flow of $330 million. If revenue growth sustains over 50% in the next few years, the company seems set to deliver OCF in excess of $1 billion in the next two to three years. As OCF and free cash flows swell, the stock is likely to trend higher. The company has an asset-light business model and marketing expenses will decline as word-of-mouth delivers new users.
Overall, RBLX stock looks attractive with the business having the potential to generate strong cash flows. It’s likely that the stock will remain in an uptrend.
Affirm Holdings (AFRM)
AFRM stock also seems attractive among the IPOs of 2021. In January, the company’s IPO was priced at $49. The listing was strong at $97 and the stock surged to a high of $146.90. Subsequently, there has been a sharp correction and AFRM stock currently trades at $70.
I believe that current levels are attractive for fresh exposure.
Affirm Holdings is in the business of building the next generation platform for digital and mobile-first commerce. The “buy now and pay later” trend is on a rise and Affirm Holdings seems positioned well in this growing market.
Affirm reported GMV of $4.6 billion last year. For the same period, U.S. e-commerce sales were $600 billion with global e-commerce sales at $3.4 trillion. Therefore, there is ample headroom for growth.
In January, the company acquired PayBright, which is one of Canada’s leading buy now and pay later providers. The IPO proceeds give the company ample financial headroom to pursue aggressive organic and inorganic growth.
For the year, Affirm Holdings expects revenue of $770 million. Further, adjusted operating loss is expected at $125 million. I would not be worried about cash burn as long as top-line growth remains robust. The business model (with repeat transactions and dollar-based merchant retention) is positioned to deliver long-term cash flows.
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.