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2019’s Best New IPOs for Investors

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It’s likely that you and/or friends have summoned a ride from Uber or Lyft. And maybe you got inspiration for your home-decorating project at the popular photo-sharing site Pinterest. But not until this year could you have invested in these fast-growing companies. All three are among the private companies preparing to sell stock to the general public for the first time, along with jeans giant Levi Strauss & Co., online broker Robinhood Markets Inc. and many others.

In all, companies may raise an estimated $60 billion through initial public offerings (IPOs) in 2019, up from $45 billion last year and the most since the $85 billion raised in 2014. (However, the partial government shutdown, which included partial closure of the Securities and Exchange Commission, may delay IPO plans for many companies.) 

What does the wave of IPOs mean for you? The potential for investment gains is enormous. But not all IPOs are good bets, especially at a time when nervous investors face heightened market volatility and fears of a possible ­recession by 2020. Of the last 100 IPOs, the share price was down for about 60 of them as of mid-­January, according to IPOScoop.com. The best-performing IPO in 2018, medical marijuana producer Tilray, rose 270% from its first-day close, while the worst, Menlo Therapeutics, a biopharmaceutical firm developing drugs for skin diseases, plunged 80%.

It’s difficult for small investors to get offering-price shares on the first day of trading because those typically are reserved for company insiders and institutional investors. But that doesn’t erase the investing potential—in fact, rather than jump in soon after a stock is issued, it often makes sense to wait a few quarters to see whether a company lives up to its earnings ­forecasts.

Whenever you may buy, it’s wise to focus on only the most attractive IPOs among the 150 or more likely to launch this year. Below are several that stand out because of their name recognition, strong position in their industries and long-term potential for rising earnings growth…

Uber vs. Lyft. The two most high-­profile IPOs expected in 2019 both are headquartered in San Francisco and have upended the taxi industry. They operate similarly, but they face different challenges. 

Uber is by far the larger, better-known and more innovative business. Launched in 2009, it has an estimated $10 billion in annual revenue and a potential total market value of more than $100 billion at the time of the IPO. It controls 70% of the ride-sharing market in the US and operates in more than 60 countries. The challenges: The company is trying to move beyond a series of scandals, lawsuits and regulatory setbacks. Uber blames most of the problems on its founding CEO and early management team, most of whom have exited. Also, Uber has faced several setbacks in its efforts to develop self-driving vehicles.

Lyft has an estimated $2 billion in ­annual revenue and a potential total market value of $15 billion. It has nearly doubled its domestic market share in two years, gaining control of 30% of the US ride-share market, largely by capitalizing on Uber’s troubles and branding itself as a more socially conscious alternative. The challenges: Uber has tremendously greater brand awareness and size. Lyft is struggling to catch up with Uber in non-ride-sharing businesses such as food delivery. And despite long-rumored plans to expand internationally, Lyft’s only service outside the US is in Canada. 

My take: Neither of these companies is profitable yet. However, Uber and Lyft have a virtual duopoly on a fast-growing industry with global potential. So instead of trying to pick a winner, the smart move is to make a broad bet on the future of ride-sharing and invest in both.

Palantir. This software company specializes in data mining—the process of sorting and analyzing digital information that organizations generate, including billions of documents, transactions and e-mail. The idea is that all this data can reveal valuable patterns and insights that can benefit organizations.

Why it’s attractive: Palantir has proved indispensable for many Fortune 500 corporations. For example, its software and consulting services have aided JPMorgan Chase in spotting cyberfraud and helped Hershey increase chocolate profits. Although privacy advocates have criticized Palantir for enabling law-enforcement agencies and businesses to snoop on citizens and consumers, respectively, global revenue for big-data analytics is expected to hit $210 billion by 2020, up from $151 billion in 2017.

Pinterest. More than 200 million monthly active users of this website save and share their favorite images, including their own photos, home décor, fashion and travel ideas found elsewhere, and other visual content on virtual “pin boards.” Mostly women, the users conduct more than two billion daily searches on Pinterest.

Why it’s attractive: By collecting huge amounts of data about users’ hobbies, habits and interests, Pinterest can provide advertisers with information to use in targeted ads. Ad revenue doubled in 2018 to nearly $1 billion, making it one of the few companies with the potential to chip away at Google’s and Facebook’s dominance. Advertisers like Pinterest because it has avoided the privacy breaches and declining usage that have plagued many of its social-media peers.

Robinhood Markets Inc. This discount online brokerage has attracted six million customers, mostly millennials under age 30, since its 2013 launch. That’s nearly twice as many as competitors such as E*Trade. Reason: Customers pay no commissions on stock and ETF trades. The company makes money from interest that it earns on customer cash balances and by charging for services such as trading on margin (borrowing money from Robinhood to buy stock). 

Why it’s attractive: Its zero-­commission model will continue to take market share from traditional brokerages because many customers want a simple, no-frills service. Robinhood’s business model is sustainable because it keeps overhead so low. It has only 250 employees (compared with 4,000 for E*Trade) and no branch offices.

Levi Strauss & Co. Levi Strauss upended the clothing industry—but that was nearly 150 years ago. Why an IPO now? The jeans industry has surged in recent years with all kinds of low-cost, luxury and leisure-wear alternatives. The company operates nearly 3,000 of its own retail locations and sells its products in about 50,000 retail outlets in more than 110 countries. Revenue growth is rising about 7% annually.

Why it’s attractive: Levi Strauss’s new CEO, a longtime “branding” expert from Procter & Gamble, has overseen a resurgence in the business that should continue, thanks to savvy marketing and the ability to adapt to current trends such as “athleisure wear” by offering stretchier, more contoured Levi Strauss jeans. 

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Source: Matthew ­Kennedy, senior IPO market strategist at ­Renaissance Capital, a global provider of pre-IPO research and two IPO-related ­exchange-traded funds (ETFs), Greenwich, Connecticut. The opinions expressed in this article do not necessarily represent those of Renaissance Capital. RenaissanceCapital.com Date: March 1, 2019 Publication: Bottom Line Personal
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