Get ready for an exciting IPO period
Head of Equity Strategy
Summary: Many companies have recently announced or filed for IPO in the US as these companies are eyeing a strong sentiment and potential frothy valuations. US IPO stocks are up 52% this year outperforming Nasdaq 100 underpinning the enormous speculative fever in IPOs. In today's equity update we take a look at the upcoming IPOs from Airbnb, Palantir, Unity, Snowflake and DoorDash which all represent interesting opportunities in the evolving digital economy.
With the 2.3% jump in Nasdaq 100 futures yesterday the US technology segment is getting extremely with sentiment mimicking the 1999/2000 years. Private companies have taken notice and are planning IPOs to take advantage of frothy valuations and positive sentiment. Today’s equity update is a preview into the upcoming IPO season with some very interesting technology companies in the pipeline.
Airbnb is one of the most anticipated IPOs since Uber
Airbnb which operates the world’s biggest rental online marketplace matching property owners with temporary renters (travel, short business trips etc.). The company announced the IPO on 19 August and filed confidentially with the SEC the day after. The actual S-1 filing with the offering details is still lacking at this point. During the low point of the pandemic bookings on their platform had fallen 90% but the recovery in travelling has put the IPO back at the map. The company had a valuation of $31bn just before the pandemic collapsing to $18bn in panicking capital raise in early April that also included a financial deal with Silver Lake and Sixth Street Partners that came with an 11% interest rate typically something we only see with distressed companies. The company reported a $400mn loss in Q2 but was more less at break-even before the pandemic. The current uncertainty might provide a historic opportunity to get access to this technology platform that is dominating the market for global temporary rental properties.
Despite the uncertainty over the rebound to normalcy in the travel segment and ongoing regulatory resistance towards the Airbnb platform to protect hotels, the IPO makes sense as early investors want to create a liquidity event as the company is now 12 years old. The IPO is probably the most anticipated IPO since the Uber IPO as it reflects the new platform economy also called the sharing or gig economy.
Can the secretive Palantir find its footing outside government contracts?
Palantir filed two days ago for a direct listing following the low-cost model of Spotify just listing and selling existing shares on the exchange directly without any major help from investment banks. The stock will be listed on NYSE under the ticker code PLTR (which means Saxo ticker code will be PLTR:xnys).
Palantir was founded in 2003 as a secretive data analytics firm that promised to find valuable information and predictive signals across many structured and unstructured databases. One of the earliest customers were the CIA and in general the company has created a strong foothold among US government agencies. However, the company has struggled to accelerate its private sector business which will be key to future growth. The filing shows that revenue was $481mn in 1H 2020 up 49% y/y and net income was negative $165mn improving from a loss of $281mn a year ago. The company does expect to pay any dividends for the foreseeable future.
The company is highlighting its government business as a potential risk to the company as it generates negative press. The CEO also said yesterday that the company has chosen ‘side’ in the US-China conflict which means that the Chinese market will not be a market it can tap into and thus potentially limiting future growth. A recent Forbes article puts out a $30bn valuation on the company at the IPO. Assuming revenue of around $1bn in FY2020 that valuation would be a stretch as a price-to-sales ratio of 30x is significantly above Salesforce at 12.5x which much more profitable, but under the right circumstances and sentiment it could be pulled off.
Gaming development platform Unity is another duopoly
As recurring readers will know we often talk about the qualities of duopolies or quasi monopolies and how it drives earnings predictability which is what every investor is looking for. Unity Software which is the second-largest gaming development platform in the world is offering exactly that. The company was founded in Denmark in 2004 but has since grown into an American business with headquarters in San Francisco.
Unity filed for IPO on 24 August with listing on the NYSE under the ticker code U (the Saxo ticker will be U:xnys) but has still not announced the offering price and thus we do not know the valuation or offering size. Unity generated revenue of $542mn in 2019 up from $381mn in 2018 translating into a healthy 42% growth rate. However, the company is still losing money with the filing indicating a loss of $54mn in the first six months of 2020 on revenue of $351mn. But the sustained high growth rate and narrower loss will underpin sentiment for this offering. Unity estimates that its gaming developing platform has a 53% market share of the top 1,000 mobile games on the Apple App Store and Google Play Store. Unity’s biggest rival Epic Games shows the potential for Unity with revenue of $4.2bn in 2019 generating earnings of $730mn.
Jump on the data revolution that will continue for years
Snowflake is a cloud-based data-warehousing started in 2012 that enables companies to store huge amount of data in the cloud but the smart thing about Snowflake is that it works on any of the major cloud infrastructure such as AWS which means that companies can utilize data portability across various cloud databases. The pandemic will accelerate the adoption of cloud-based services as they reduce fragility for any organisation as it can run from any physical location in the world. The strange thing about Snowflake is that it competes against Amazon, Microsoft, and Google in the cloud infrastructure business, but it is also a great customer with these companies. Investors are likely to be excited over this IPO as it provides an opportunity to get pure exposure to cloud infrastructure instead of partially exposure through Amazon, Microsoft and Google that are all driven by different core businesses ranging from e-commerce, computer operating systems and online search engine.
Snowflake will list on NYSE under the ticker code SNOW (Saxo ticker will be SNOW:xnys) and has still updated its S-1 filing with the offering size and price range for its shares. Back in February before the pandemic broke loose the company raised $479mn at a $12.4bn valuation up 200% from its October 2018 capital raise. The filing shows that revenue for the six months ending on July 31, 2020 was $242mn up 133% y/y which is a much higher growth rate than any of its competitors but obviously also from a lower revenue base. The gross margin has increased from 46.5% in the FY18 ending 31 January 2019 to 61.6% for the six months ending 31 July 2020 showing the business has hit an inflection point in terms of economics of scale. Snowflake lost $171mn in the six months ending 31 July 2020.
DoorDash is aiming for an IPO in Q4
DoorDash was founded in 2013 and is a US-based on-demand prepared food delivery and takeout service from local restaurants. The company announced its intention to IPO already back on 27 February but has since postponed it due to the global pandemic but said recently that it is expecting to IPO in Q4 possibly in November or December. DoorDash raised $400mn in June at a $16bn valuation and is still not profitable. The company generated $900mn in revenue in 2019 but with the restaurant business under severe pressure the demand for DoorDash has taken a hit, but on the other the business could become a lifeline to restaurants serving customers afraid of sitting close to other people in indoor facilities.
US IPO stocks are red hot this year
US IPO stocks are up 52% this year compared to Nasdaq 100 up 38% highlighting the investor sentiment for IPO stocks. There are two ways to get exposure to IPO stocks. One can be selective a buy into the IPO stocks on the first day of trading or buy a basket of IPO stocks through an ETF. The most tracked IPO ETF is the Renaissance IPO ETF (IPO:arcx) with $116mn in assets under management. IPO stocks outperforming the market is often a temporary thing that relates to timing of sentiment as IPO stocks over the past five years have returned 16% annualized vs 23% for the Nasdaq 100.