Bottom of the Barrel: A Review of Recent IPOs
It’s no secret that many well-publicized IPOs this year have been unmitigated disasters. Snap (NSDQ: SNAP), the poster child for overpromising and under delivering, reported another clunker quarter last week. Its stock fell 17% and now trades at $12, 30% below the IPO issue price.
Fishing In the IPO Bin
Blue Apron (NSDQ: APRN), another high-flying deal also got croaked. The meal delivery service reported a shocking 6% decline in customers and a puny 3% jump in total revenue. This drop compares to the 23% customer growth reported in the prior quarter. The stock lost its cookies, dropping 40% and now trades at $3.00 versus its $10.00 IPO price.
I’ve found some terrific young stocks in the IPO bin, so I’m always fishing in that pond for new ideas. But, yuck, what a swamp of lousy options I found.
A continuation of public companies gobbling up private ones and the copious flow of investment capital by private equity have left investment bankers with slim pickings for the IPO docket.
Market data expert FactSet notes that $1.6 trillion was spent on mergers in the past 12 months, up 5.5% from the prior year period. Roughly 12,000 deals closed. Not every one of those companies was likely a candidate for an IPO, but that is a heck of a lot of inventory being sucked up by mergers.
Fuzzy Vision and Bobble Heads
Here’s a quick review of some of the swamp monsters I encountered in the IPO bin:
National Vision (NSDQ: EYE): At first glance, this deal looked promising; a conglomeration of four vision chains covering the nation. The company operates Vision Centers in Walmart and over 550 America’s Best eyeglass and vision screening stores. Revenue is growing low-mid teens.
Upon closer inspection, the numbers are fuzzy. Expenses to run the vision centers have been rising faster than revenue growth, rendering each vision center less profitable.
Still digging, I got excited about the trend in overall corporate expenses, which are growing slower than revenue and compensating for the higher store level costs. That’s when I stumbled on to this one-liner explanation as to why the expense rose so slowly:
“We incurred lower performance-based incentive compensation expense as a percentage of net revenue in the six months ended July 1, 2017, compared to the six months ended July 2, 2016, as a result of our actual sales performance compared to our planned levels.”
This might be the worst possible excuse for lower corporate expenses. Expenses didn’t increase because results were not strong enough to merit bonus payments. I also wonder about management’s limited visibility and the lack of levers it has to ignite growth.
National Vision is up 37% from its late October pricing at $22. I’m scratching my head to understand what has investors so excited about this name, but I’m passing on it.
Next up was Funko (NSDQ: FNKO).
It sounded like it might have promise. The company licenses pop culture characters from media companies like Disney and Marvel and make toys like bobble heads and vinyl figures. It’s a wacky business, but if a company could create a steady stream of earnings, I thought it might be an interesting stock.
However, revenue grew just 3% in the most recent quarter, and losses started seeping in. The stream of sales is lumpy and chaotic, not the best combination for Wall Street, who loves order and predictability.
It’s no surprise the stock had one of the worst IPO openings of the year. After pricing the deal at $12, below its original price range of $14-16, the stock opened at $8.50 and now trades at $7.95. I guess I’m not alone in my analysis of the company.
Self-Imposed Rules and Restrictions
I have a pretty firm rule to avoid recommending public companies that are losing money. I will sometimes make an exception for one that is losing a small amount but still generating good cash flow.
The expectation is that this restriction will help provide a downside buffer to my portfolio if the market washes out. However, sometimes those with the biggest losses become market favorites.
This market has been quite friendly to biotech deals, which also don’t make my cut primarily because most of them are not generating any profits. Again, I note this does not mean these stocks won’t rise. I simply don’t have the expertise to analyze their scientific credibility.
These IPOs didn’t make my list because they are all losing money:
- Apellis Pharmaceutical (NSDQ: APLS) * No revenue either
- Fireman B.V. (NSDQ: IFRX)
- Forescout Technologies (NSDQ: FSCT)
- MongoDB (NSDQ: MDB)
- OptiNose (NSDQ: OPTN)
- Spero Therapeutics (NSDQ: SPRO)
I do have a small list of some strong gilled minnows that were swimming around in that IPO pond. I’m working through their numbers and deciding if any will make the cut for my Profit Catalyst Alert portfolio.