The year 2021 marked the strongest for initial public offerings (IPOs) in US history, with more than 1,000 companies going public, outpacing even the 1990s dot-com boom. Stock expert Hilary Kramer expects more of the same in 2022 thanks to ongoing factors such as a strong economy, a stock market that could continue to set new record highs and a star-studded lineup of private businesses ranging from online grocery-delivery service Instacart to video-game maker Epic Games.
But Kramer also cautions small investors to be very picky and patient. Last year, about 60% of companies that went public ended up trading below their IPO prices by year-end. The average 2021 return of the benchmark Renaissance IPO Index was –10% versus a 27% gain for the S&P 500. And some of the most high-profile names fared the worst last year, including online broker Robinhood (–58%) and cryptocurrency exchange Coinbase Global (–34%), because the hype surrounding their potential failed to translate into profits.
Bottom Line Personal asked Kramer what lessons we should take away from last year and which IPOs look the most attractive this year…
Lesson #1: Look for disruptors. Focus on companies that really stand out. They should have disruptive technology and/or business models that are changing the landscape of an entire industry or sector. Example: Last year’s IPO of the financial-technology company Affirm Holdings, which is taking on traditional credit card companies by allowing retailers such as Walmart and Shopify to offer buy-now-pay-later loans for their merchandise. Affirm’s starting IPO share price of $49 in January 2021 jumped to $100 by year-end.
Lesson #2: Track newly public companies for a few quarters before investing. There’s no advantage to jumping in on the first trading day. IPO shares typically dip sharply after an initial pop. Take time to analyze a company’s valuations and how its fundamentals fare as a publicly traded business, especially in this high-inflation, rising-interest-rate environment.
Lesson #3: Be wary of SPACs. More than half of 2021’s IPO deals were “special-purpose acquisition companies.” These shell companies raise millions of dollars in an IPO with the intent of acquiring a private company in the future. That company then becomes public as a result of the merger. Problems: A SPAC is a blind bet on the managers’ acumen to acquire a winning private company. SPACs often make lofty projections about future earnings of the companies they plan to acquire. And the SEC already has stepped up pressure on SPACs because their deals are allowing them to avoid regulatory scrutiny.
Here are five companies to watch and possibly invest in…and three to avoid…
Authentic Brands Group. The brand-development and entertainment company made a name for itself by collecting fees for the rights to use iconic celebrities such as Marilyn Monroe and Elvis Presley in product advertising and marketing campaigns. In the past few years, however, the company has developed an even more lucrative business model—scooping up more than two dozen companies with well-known brand names and breathing new life into them. Authentic Brands’ portfolio, which generates more than $10 billion in sales annually, ranges from Brooks Brothers, Nine West and Eddie Bauer to Sports Illustrated and Reebok. It develops the brand name, then licenses out day-to-day activities such as manufacturing and managing operations and inventory. Example: Authentic Brands paid $110 million for the print magazine Sports Illustrated in mid-2019 and turned it into a springboard for digital sports gaming, live events and sports betting. This IPO may not happen until late 2022 or 2023, but keep it on your radar.
Epic Games. The video-game maker is known for multiplayer online games such as Fortnite, which has attracted hundreds of millions of active users. The game can be downloaded for free, but most players spend money on virtual weapons and costumes to upgrade their gaming experience. Other catalysts: Royalties from Unreal Engine, the company’s powerful gaming software platform that allows other game makers to create graphically intense, 3-D games…and the growing popularity of e-sports—broadcast videogame competitions with leagues and corporate sponsors in which viewers watch their favorite gamers play in real time.
Instacart. This is the largest supermarket and grocery-delivery service in North America and was one of Bottom Line Personal’s top IPO picks last year. Almost every major supermarket chain in the US teamed up with Instacart to help fend off Amazon’s move into the industry. New CEO Fidji Simo, a former Facebook executive, delayed Instacart’s public debut as it transitioned from a pandemic novelty to a routine service to make household errands easier. Instacart also has expanded into nongrocery items, striking partnerships with 7-Eleven, Costco, CVS and Sephora.
Ro began as an online pharmacy—Roman Health—catering to men with medications for hair loss and erectile dysfunction and lining up virtual doctor consultations to keep prescriptions current. As interest in telemedicine exploded, Ro expanded into female-oriented products such as at-home fertility tests and weight-loss drugs. Ro also has become a leader in integrating remote and in-home care. Its new brand, Zero, helps people quit smoking through medication, a smartphone app and online meetings with licensed physicians.
Stripe. About a dozen years ago, two brothers dropped out of MIT and Harvard to cofound this financial-tech company, which helps Internet merchants accept payments in more than 120 countries. Stripe is the most highly anticipated IPO of 2022. Thousands of major companies ranging from Amazon to Kickstarter to Uber use Stripe, which raked in an estimated $7.4 billion in revenues in 2020. The company now is focusing on higher-margin e-commerce products and services such as rapid loans to small businesses that are repaid through a percentage of daily sales.
The companies below have compelling brand names, but they face serious obstacles to growth and profitability…
ByteDance is a Chinese social-networking service that offers special effects to create short videos of stunts, dances and entertainment. In America, it’s known for TikTok. The company boasts about two billion active monthly users. Why avoid it: Beijing is making major policy shifts, emphasizing social good over profitability, with little regard for shareholders. In the US, the SEC is clamping down on Chinese companies that list their shares on American exchanges but don’t comply with US auditing standards.
Lime. This scooter-rental service has launched operations in more than 150 cities around the world. Why avoid it: Lime faces a multitude of challenges, including cities regulating operators, class-action lawsuits from injured riders and insurers leery of safety risks.
Reddit. The social-media platform is home to the online forum “WallStreetBets,” which has a fiercely loyal audience of amateur investors. Why avoid it: It’s a niche, online media play in a space dominated by audio- and video-savvy behemoths such as Google’s YouTube, Facebook and Twitter. Also, as a public company, Reddit will face heavy scrutiny over its practices including inflammatory content and misinformation.
