Last year, IPOs soared in an investor frenzy not seen in years with nearly 220 companies offering stocks worth $78 billion. Airbnb, the online lodging rental site, surged 113% on its first day of trading, topping $100 billion in market capitalization—larger than Marriott, Hilton and Hyatt Hotels combined. Cloud-data software company Snowflake, which rose 112% on day one, created so much buzz that even Berkshire Hathaway’s Warren Buffett invested—the first IPO shares he has purchased since the Ford Motor Co. IPO in 1956.
Jan Paschal and John Fitzgibbon, who run an IPO news and data service, say 2020’s surge was driven by a perfect storm of factors that are likely to endure this year. They include the US stock market’s rally to record highs…the hunger for young Internet companies that grow fast in a slow-growth economy…near-zero interest rates pushing investors to seek higher returns in riskier assets…and the pandemic’s dramatic effect on consumers’ habits accelerating the shift toward more digital lifestyles and services.
Bottom Line Personal spoke to Paschal and Fitzgibbon, whose service provides IPO ratings based on the consensus opinions of Wall Street professionals about how an IPO will perform on its first trading day. They shared the inside scoop on private companies expected to launch IPOs in 2021, including one of the largest Internet dating services…a digital-payment processor that is taking on PayPal…and an online delivery service that has become a lifeline to millions of shoppers.
How To Invest in IPOs
Even though IPOs should continue to attract enthusiasm this year, potential investors still need to be choosy, read the prospectus of a company about to go public, seek advice from their brokers and proceed carefully. Many of the firms have meteoric growth but little or no profits. Although the average IPO in 2020 enjoyed a 41% first-day return, most of those potential profits went to institutional investors who scooped up initial IPO shares in advance.
Upcoming or recent IPO stocks worth considering…
Bumble.* The stigma of online dating is gone thanks to coronavirus. Bumble has become the world’s second-largest dating app behind Tinder, which appeals to singles under age 35. In 2020, 100 million users in 150 countries signed up with Bumble, a 33% increase from the previous year. Its secret? Appealing to young single women. Users swipe left or right to indicate interest in matches, but unlike Tinder, the app requires that women make the first move. It is free, but Bumble earns revenues via premium add-on features. The stock has the potential to do as well as Match Group (the owner of Tinder), which has risen more than 700% since its 2015 IPO.
DigitalOcean. With the pandemic accelerating the transition of businesses to the cloud, most people have become familiar with companies such as Amazon Web Services and Microsoft Azure. But this under-the-radar firm is the world’s other leading cloud platform and infrastructure provider. Like those giants, it helps software developers and businesses transfer data, communications and software-based operations onto the Internet and set up customized servers. But DigitalOcean provides low-cost services for more than 700,000 small businesses that need more affordable cloud services than large corporations. The company is backed by Silicon Valley venture capitalist Marc Andreessen, who has been an early investor in startups ranging from Facebook to Twitter.
Instacart. Started by a former Amazon.com engineer, the largest supermarket and grocery-delivery service in North America allows you to shop online via app from more than 40,000 retailers in 5,500 cities. Almost every major supermarket chain in the US, from Albertsons to Kroger to Safeway, has teamed up with Instacart to help fend off Amazon’s move into the industry. And it is expanding into nongrocery items, including partnerships with 7-11, Costco, CVS and Sephora. Even after the pandemic, consumers will continue to rethink how to do household errands easily and efficiently.
Oscar Health. This innovative company is upending the stodgy insurance industry. Its services include 24/7 access to doctors online, telemedicine visits for check-ups, prescription refills, behavioral health services and more transparent cost estimates for patients. In major markets such as Miami, New York City and Los Angeles, Oscar Health has introduced $0 Virtual Primary Care, which offers a slew of digital and in-home services at no extra cost beyond the monthly premium. The company reported more than $2 billion in revenue last year and is growing by about 70% a year. It currently operates in more than a dozen states and plans to further expand in 2021, providing nearly a half-million members—including individuals, families, Medicare Advantage members and small businesses—with coverage under the Affordable Care Act.
Stripe. Ten years ago, two brothers from Ireland—Patrick and John Collison—dropped out of MIT and Harvard, respectively, to start a financial technology company. Their easy-to-use software allows small merchants on the Internet to accept payments from consumers and other businesses. With the popularity of digital payments soaring, Stripe has emerged as a formidable competitor to PayPal and Square. Thousands of companies including Amazon, Shopify, Wayfair and Zoom Video Communications use Stripe to accept payments from anywhere in the world. Stripe, which says it processes hundreds of billions of dollars in payments annually, is making a push to diversify into higher-margin products and services that help online businesses function and grow. Example: Stripe Capital makes quick loans up to $25,000, available in as little as one day, to small-business customers that repay the loans through a percentage of daily sales.