A Closer Look Into IPOs...Fintech, Insurance, And Who's Next đź‘€
Hi all, Julie here.
Let’s talk about IPOs.
Much like the stock market being at all time highs, the fact that we’ve had a number of good performing IPOs during the pandemic is also surprising to many of us.
There are a few things feeding this trend, depending on which IPO we’re talking about. For all of them, the recent surge in retail demand certainly helps. For some, their perspective sectors have actually benefited from the pandemic in some ways. My biggest question is now whether these companies continue to perform well, or if they go the way of the fintech IPOs we think of when talking about Fintech 1.0. LendingClub, OnDeck, and Greensky. Of course, this is just one sector and other companies have fared much better (ie: Square), but all of them had the same initial fanfare before they tumbled. On the contrary, Square had a pretty iffy IPO and has surged in years since.
Let’s take Bill.com. Technically this one was pre-pandemic (although it was already occurring in some parts of the world). It went out at $22 a share and currently trades at $86. This is one of the businesses that has outperformed during the pandemic. In its most recent earnings report, revenue jumped 46% to $41.2M for the quarter, topping the consensus estimate of $36.8M. Lots of this is due to a growing customer base and more transactions occurring on the platform, with total payment volume jumping 35% to $24.2B, and customers growing 28% to 91,000.
This company appears to have a lot of room to run, especially in a work from home environment as well as a growing number of freelance and contract workers that are often paid on the platform. So, as of now, it doesn’t appear Bill.com’s is going to tumble any time soon.
Then there’s Lemonade. This one was more surprising to me and others in the space, especially when its S-1 financials weren’t exactly stellar. However, that hasn’t stopped traders from piling in. After pricing at $29, the stock now trades at $63 just a few weeks later. This one is less promising than Bill.com, though it’s not an entirely gloomy picture either. If the company can improve some of its financial metrics and show that renters convert to homeowners on the platform (a more profitable segment, but a small one for Lemonade right now), then I could see a solid argument to buy. However, even the lead bank on the IPO now has a sell rating on shares and a price target of $44, much lower than its current market value. In the note, Heath Terry wrote "with 140% y/y gross earned premium growth in the most recent quarter, ~5 years of expected operating losses before reaching breakeven, and significant capital needs beyond the most recent IPO, Lemonade is essentially venture investing in the public markets.”
Hence why I’m not completely counting them out, but I’m also not tempted to buy their stock either.
Then there’s Rocket Companies. After pricing slightly below the range they had been marketing in the road show, it’s trading higher, but barely. Part of what was at play here was bankers seeing what was happening to other recent IPOs and aiming for a valuation that was a bit higher than it should be when looking at competitors. While it’s a profitable business and has grown substantially in recent years, its core earnings are shrinking rather than growing, not something you like to see from a newly public company. There are a lot of macro issues at play that could help though, such as more people moving to suburbs and millennials coming to an age where they are beginning to buy their first homes. So, I’m not pessimistic on this stock, but I also wouldn’t expect to make a killing on my shares in a few days or weeks like Robinhood traders are hoping for.
The last two companies I have to talk about are both in the software field. BigCommerce and nCino. The former rose close to 300% in its trading debut (no that’s not a typo). It priced shares at $24 and now trades around $75 just a few days after going public. BigCommerce is often compared to a company we talked about last week, Shopify, which has had a staggering rise in market value this year. It’s a space where there’s room for more than one winner, so I’d assume there’s a lot of people trying to play that broader theme here.
nCino also had a triple digit percent surge on its opening day, rising to more than $70 after pricing at $31. Its operating system helps with onboarding, loan origination, and account opening for more than 1,100 financial institutions (both big and small). This seems to seize on the trend of more automation in financial services, and it being done through outsourcing rather than building in house.
If I were to take a stab at who else might IPO in the next 1-12 months, I’d argue there are a few that would likely do well, but as we get closer to the election, it feels a bit more risky to go out. The market could take a turn if government stimulus dries up even more than it already has. A number of the startups that come to mind also raised recently and have no reason to go out if they don’t have to. Companies like Stripe, Robinhood, Marqeta, C2FO, AvidXchange and others. I feel like many of these are more likely to happen in 2021 depending on how the market is acting at that point. But again, I wouldn’t have predicted the IPOs of several of the companies that have already gone, so who am I to say when Robinhood customers might be able to buy puts and calls on the company itself.