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In 2019, we wrote about a look at previous IPOs. What are IPOs and the advantages of participating in them?
2019 is a blockbuster year for tech IPOs with highly anticipated giants like Uber, Lyft, and Airbnb finally ready to go public after years of preparation.
Let’s take a look at 6 well-known companies that have gone public so far this year and see how they have fared. We will look at some details around the IPO process, introduce some financial analysis concepts such as ratios, and if participating in the IPO gives certain advantages over investors buying on the first day of trading.
If you aren’t familiar with IPOs, revisit our IPO primer.
Lyft is the smaller competitor to UBER and only provides ride-hailing services in the US. We were surprised to learn that Lyft actually introduced ride-sharing before Uber.
The company worked with bankers to set a price range of $62 to $68 per share for 30.7 million shares of Class A common to be sold. Due to the highly anticipated IPO of the first of the ride-hailing giants, the offering was oversubscribed and the price was raised to $72 per share — valuing the company at $24 billion. For 2018, LYFT reported revenues of $2.2 billion, which results in a backward-looking revenue multiple¹ of 10.9X.
On March 29th, LYFT opened trading at $87.33 and closed at $78.29 per share. Today LYFT is trading at $52.02 per share, meaning if we bought at the start of the day on March 29th, we would be looking at a loss of 40%.
For the participants in the IPO that bought in at $72 per share, they are looking at a loss of 28%.
Business description: Uber is the market leader in ride-hailing services, operates internationally, and provides on-demand food delivery service via Uber Eats. Dara Khosrowshahi, the CEO who took Uber public, replaced Travis Kalanick, former CEO and founder of Uber, in 2017 after internal disputes between Travis and Uber’s private investors.
IPO process: The company worked with bankers to set a price range of $44 to $50 per share. Through the underwriting process, Uber ended up pricing their shares at $45 per share, bringing the company to a valuation of $82.4 billion. The WSJ reported that the performance of Lyft’s IPO two months prior reduced the appetite for shares of UBER. UBER reported 2018 revenues of $11.3 billion resulting in a backward-looking revenue multiple of 7.3X.
Opening day: On May 10th, UBER opened trading at $42.00 a share and closed at $41.57 a share. Today, UBER is trading at $33.90 a share — if we bought at the start of the day on May 10th, we would be looking at a loss of 19%.
For the participants in the IPO who bought in at $45 per share, they are looking at loss of 25%.
Beyond Meat is the company behind Beyond Burger and other plant-based meat substitutes. They are the first company to offer a meatless burger to be sold in the meat section of grocery stores. Founder and CEO of Beyond Meat, Ethan Brown, worked in the energy sector developing proton-exchange membrane fuel cells before starting Beyond Meat.
The company worked with bankers to set a price range of $19 to $21 per share for the public offering. The offering was quickly oversubscribed and the 9.625 million shares of common for sale ended up being priced at $25 per share, valuing the company at $1.46 billion. In 2018, Beyond Meat reported revenues of $87.9 million and a backward-looking revenue multiple of 16.6X.
On May 2nd, BYND opened trading at $46.00 a share and closed at $65.75. Today, BYND is trading around $150 a share meaning if we were able to time our buy at the start of the day on May 2nd, we would be looking at over a 200% return.
IPO participants who bought in at $25 a share are looking at about 500% return.
Slack provides a workplace productivity tool that lets users chat with each other, share files, and connect to other productivity tools. Slack was founded in 2009 by Stewart Butterfield, who previously founded and sold the photo-sharing website Flickr.
The company elected to do a direct listing and did not hire bankers. Part of the S-1, WORK reported 2018 revenues of $400 million and received a reference price of $26 per share, valuing the company at roughly $15.7 billion. The backward-looking revenue multiple is the highest we’ve seen thus far at 39X if the stock trades at the reference price. This multiple will go up or down based on how the stock trades on the opening day. An important note is that, unlike traditional IPOs, direct listings do not offer a predetermined amount of shares to be sold but offer all of the shares in the company for trade.
On June 20th, WORK opened trading at $38.50 and closed at $38.52 a share. Today WORK is trading at $30.53 per share — had we bought in at the opening of $38.50, we would be looking at a loss of 21%.
Zoom provides a video conferencing tool that lets users meet virtually from computers, phones, tablets, and TVs. What is notable about ZM is that it is one of the few profitable companies that has gone public this year. Zoom CEO Eric Yuan had a difficult time raising money from VCs to start the company because the competitive space around videoconferencing was dominated by Cisco, Google, and Skype.
The company worked with JP Morgan, Morgan Stanley, and Goldman Sachs on a price target of $28 to $32 per share. Oversubscription allowed ZM to raise the offering to $36 per share for the 9.91 million of Class A common shares, valuing the company at $9.2 billion. ZM reported 2018 revenues of $330 million which translates to a backward-looking revenue multiple of 27.9X.
On April 18th, ZM opened trading at $65.00 a share and ended at $62.00 a share. Today ZM is trading at $93.81 meaning if we bought in at the opening of $65.00 we would be looking at a return of 44%, nearly half our investment.
For the participants of the IPO who bought at $36 per share, they are looking at returns of 160%.
Pinterest is a consumer app that lets users create and organize digital scrapbooks. Private investors in Pinterest had valued the company at $12.3 billion in 2017, which is higher than the public valuation for Pinterest in the IPO.
The company worked with JP Morgan and Goldman Sachs on a price range of $15 to $17 per share. Healthy appetite resulted in the offering locked in at $19 per share, valuing the company at just about $10 billion. Pinterest reported 2018 revenues of $756 million resulting in a backward-looking revenue multiple of 13X.
On April 18th, the same day of ZM’s debut, PINS started trading at $23.75 and ended at $25.40 per share. Today, PINS is trading at $35.44 per share meaning if we bought in on the first day of trading at $23.75, we would be looking at gains of 49%, comparable to ZM.
For the participants of the IPO who bought in at $19 per share, they are looking at returns of 87%.
 A backward-looking revenue multiple is calculated by taking the current valuation of the business divided by last year’s revenue. This multiple serves as a back of the napkin gauge for investors to look at the value of a company compared to its ability to generate revenue. This metric is helpful when comparing companies that operate in similar markets to see if a specific company is relatively over or under-priced. The higher the revenue multiple, the more highly the company is valued by investors.
Out of the six companies covered, only investors who bought in early at the IPO price for UBER have fared worse than the general public buying on the first day of trading. For the remaining five cases, the gains or reduction of losses significantly favor the IPO participants compared to public investors — having a relationship with investment bankers seems like it does pay off.
There is not a firm correlation between the IPO multiples and how the stock performs after the first day of trading. UBER and LYFT, with revenue multiples of 7.3X and 10.9X respectively, ended up dropping after their IPO while BYND and ZM, with multiples of 16.6X and 27.9X respectively, are significantly higher after their IPO. This could be due to a few reasons including differences in business models, the potential for future growth, earnings, losses, and speculative demand for the stock. We’ll discuss these topics in detail in our upcoming posts.
The potential gains or losses of these IPOs were calculated based on the assumption that you would participate on the first day of trading of a newly public company. Coming up in the next post, we’ll explore if buying on the first day is a good idea or if taking a wait-and-see approach is better.