Uber Technologies took investors on a wild ride in 2019, plunging 40% in the seven months after the car-for-hire service’s stock debuted. And WeWork, which rents out shared office space, halted its planned initial public offering (IPO) as its supposed valuation plummeted from $47 billion to $5 billion.
Clearly, it was a disastrous year for some high-profile IPOs that melted even as the overall stock market soared. But don’t be so fast in judging the prospects for future IPOs, says stock expert Hilary Kramer. Investors who choose the right ones while avoiding overhyped underperformers can garner substantial profits. Examples: Beyond Meat, which produces plant-based meat substitutes, tripled in price over seven months from its initial share price. Shares of InMode, a medical technology company based in Israel, tripled in price over four months.
Bottom Line Personal asked Kramer what lessons investors can learn from 2019’s IPOs and to share her favorite—and least favorite—possible IPOs for 2020…
Lesson #1. Profitability matters. Young companies with innovative ideas and fast growth may entice Wall Street but don’t always overcome huge losses, questionable business models and management scandals. Example: In 10 years, Uber has never been profitable and lost more than $3.7 billion in the year leading up to its IPO. In contrast, even Amazon.com, which famously eschewed profits for years in favor of building its massive customer base, was profitable by year 10. Uber is counting on future fleets of self-driving cars to reach profitability. But analysts say the company will more likely have to increase fare prices and/or lower what it pays drivers. That will slow revenue growth and weaken the company’s advantage over taxicabs and car-for-hire competitors. And the company has been plagued by a series of scandals and power struggles that included the ouster of cofounder and CEO Travis Kalanick. Lyft, which is Uber’s smaller rival and which also went public last year, saw its share price drop nearly 40% over seven months, similar to Uber’s performance.
Lesson #2: Don’t ignore foreign opportunities. Most investors tend to focus on IPOs of US companies because they are familiar with them. As a result, some dynamic foreign companies that go public on US exchanges often are undervalued.
Lesson #3: Avoid buying on the first day of the IPO. That’s when speculators and media attention can cause the price to soar to unsustainable heights. Example: Shares of The RealReal, an online consignment shop that buys and sells authenticated luxury brands such as Cartier and Gucci, jumped 40% in its first day last June. But it has had to deal with accusations of counterfeit items. The stock was recently trading about 20% below its initial share price. Being patient and waiting for at least one quarter before jumping in allows you to judge how the company is really performing and gauge its long-term potential in a more levelheaded way.
The following companies are my favorites among the 125 or so expected to go public in 2020. They all are either profitable or have a clear path to profitability in the next few years…
Ant Financial Services Group originally ran the in-house online payment services for Chinese e-commerce giant Alibaba. Similar to what PayPal became after it was spun off from eBay, Ant has been separated from Alibaba since 2014 and it has more than 900 million active users in China and 1.2 billion globally. Why it’s attractive: Ant Financial will benefit from China’s strong consumer spending, which, despite the overall economic slowdown there, is growing at about 9% annually, compared with less than 3% in the US. Also, the company is broadening the financial services it offers throughout Asia. It now operates online banks, a credit-reporting system and Yu’e Bao, the world’s largest money-market fund, with 400 million users. I expect many profitable and fast-growing private Chinese companies to go public this year if US–China trade tensions subside.
Avaloq, based in Switzerland, provides software for digital banking, data analysis and backroom processing of transactions for European financial institutions such as HSBC and Barclays. Companies access Avaloq’s cloud-based software over the Internet to help manage $4.5 trillion in client money. Why it’s attractive: Major banks around the world are aggressively digitizing in order to improve profitability. That helped Avaloq pull in revenue of nearly $290 million in the first half of 2019. Avaloq’s majority owner, private equity group Warburg Pincus, has announced it is planning an IPO or sale of the company, which now is expanding into the Asia-Pacific market. Recently, Avaloq struck a deal with Indonesian giant Bank Mandiri to provide software for its $14 billion wealth-management division.
Instacart has found a profitable way to simplify one of life’s drudgeries—supermarket shopping. It runs the largest same-day grocery-delivery service in North America. Customers can shop for groceries through a mobile app at more than 20,000 retailers in 5,500 cities. Instacart charges a small delivery fee ($3.99 for orders of $35 or more) and contracts with tens of thousands of “personal shoppers” who use their own cars to collect the groceries and deliver them. Why it’s attractive: Most major supermarket chains, including Albertsons and Kroger, have chosen Instacart as their partner to help fend off the threat from Amazon’s move into the industry. Instacart also has struck partnerships with Costco and CVS.
One Medical Group is a chain of primary-care clinics that offers medical checkups, referrals to specialists and other services that don’t require urgent care. Backed by Google parent company Alphabet, the company employs technology such as immediate video consultations available 24 hours a day to boost profits and improve patient satisfaction. One Medical accepts most insurance plans but also charges patients a $199 annual membership fee that allows them to get same-day appointments. Why it’s attractive: Publicly traded companies that offer virtual health care are thriving. One Medical Group already has more than 70 offices in nine major US cities and has recently begun offering services such as mental health and pediatric care.
These IPOs offer popular services, but neither is profitable, and they face significant impediments to future growth…
Robinhood Markets has become a phenomenon in the brokerage industry since it launched in 2014, offering a mobile app with basic functions for online investing plus free stock and exchange-traded fund (ETF) trading. Why you should stay away: Although I initially had high hopes for this company, it will have trouble competing against giants such as Fidelity and Schwab, both of which have begun offering free online trades of stocks and ETFs.
Virgin Trains USA is a passenger train service operating between Miami and West Palm Beach and also holds the rights to build a line between Las Vegas and Southern California. The company is partly owned by British business magnate and billionaire Richard Branson, who has a knack for transportation projects, having founded Virgin Atlantic Airlines and space tourism company Virgin Galactic. Why you should stay away: Railways don’t have the cachet of outer space. Constructing new passenger lines likely will swamp the company with long-term debt and create operating losses for many years.
I’m on the fence about Airbnb, the home-sharing pioneer, considered the marquee IPO for 2020. On one hand, Airbnb was profitable (after excluding expenses such as taxes and interest) for the second year in a row in 2018. Its quarterly revenue has topped $1 billion, and it connects more than two million travelers in 191 countries each day with hosts renting out space in their homes. Its management ranks are filled with smart former Amazon.com executives.
But I can’t overlook the regulatory challenges to Airbnb’s business model, which likely will make the stock very volatile. Dozens of major cities, including Barcelona, New York and San Francisco, have adopted ordinances restricting short-term rentals. Also, Airbnb’s operating loss reportedly soared to $306 million in its first quarter of 2019 as expenses related to preparing for the IPO mounted.
What to do: Take a wait-and-see approach for several quarters to see whether the company can work with cities to reach acceptable policy guidelines.
