What we are currently witnessing in the IPO market is truly fascinating. Some would even call it a buying frenzy. There’s no shortage of new companies for investors to choose from, thanks to over 447 IPOs on the U.S. stock market this year. That’s an increase of over 96.9% from 2019 and the most since 1999 and 2000, which older investors will recall was right before the dotcom bubble burst.
There are several reasons why the IPO market has likely been so hot. First, you have the pandemic causing massive changes to the way we live our lives that is driving interest in “new economy” companies. Also, a low-interest rate environment is typically thought of as favorable for high growth companies. Finally, the market’s overall strong performance this year has led to a massive influx of speculative money.
Investors should try to avoid getting caught in overinflated prices on the latest IPOs, even if they are great companies. After some of the initial hype dies down and we have more information about the actual earnings of these companies, investors can then make a more educated decision about whether to or not they want to buy.
The bottom line is that a little bit of patience can pay off when it comes to investing in IPOs, which is why we’ve put together a list of 3 recent IPOs for investors to monitor.
Airbnb’s IPO was one of the most anticipated market debuts in recent memory, but many investors were left scratching their heads after the stock opened at nearly double the IPO price of $68. Either the underwriters did a poor job of pricing this IPO, or they deliberately underpriced it to artificially boost the demand. While it’s easy to recognize the potential in a company that is completely changing the way that people travel, the fact that the company’s valuation has increased so much during its first trading day should raise some red flags. However, that doesn’t mean that investors should write-off Airbnb entirely.
Airbnb is disrupting the travel industry by providing a convenient online marketplace for finding lodging. Before Airbnb, travelers were pretty much limited to staying at hotels during their time spent away from home. Now, travelers can choose from a huge selection of apartments, condos, and even private villas listed on Airbnb’s user-friendly online platform. The travel industry has been decimated this year thanks to the pandemic, and Airbnb reported a year-over-year revenue decline of 72% in Q2. With that said, there are early signs of a recovery as the company reported $219 million in profits during Q3 2020. Investors should probably wait until we get more confirmation that travel volume is rebounding before adding shares.
Hydrofarm Holdings Group (NASDAQ:HYFM)
If you are interested in a company that offers exposure to the cannabis market without actually selling cannabis, Hydrofarm Holdings Group is a great stock to watch. The company is the largest independent distributor of hydroponics equipment in North America. If you aren’t familiar, hydroponics equipment is used to farm plants like cannabis outside of the soil. Legal cannabis farms need products like hydroponics equipment, indoor grow lights, sediment filters, and more to successfully grow their product. If President-elect Joe Biden follows up on his promise to decriminalize cannabis at the federal level, the demand for Hydrofarm’s products could see a huge uptick.
Unlike many of the recent IPOs, Hydrofarm was able to report a profit of $2.1 million in income for the nine months ended September 30th. The company also saw strong year-over-year sales growth of 40% for the nine months ended September 30th. Hydrofarm’s IPO was priced at $20 but the stock opened at $47.20, confirming that there are plenty of buyers interested in cannabis-adjacent companies. Keep an eye on this stock in 2021 as it could benefit from several strong catalysts.
Another big IPO debut that investors should monitor going forward is C3Ai Inc, a California-based technology company. Its software platform can help businesses save tons of time and money by helping them build out artificial intelligence solutions. It’s a SaaS business, meaning that the company sells its software for a subscription fee and takes in recurring revenue from each client that signs up. According to the prospectus, the company received an investment of $50 million from Microsoft back in late November. This could turn out to be a fruitful relationship, as Microsoft has stated it will jointly market and sell C3’s software on Microsoft’s Azure Cloud.
C3 estimates that its total addressable market will amount to $271 billion by 2024. The company also reported 71% year-over-year revenue growth in FY20. However, the $69.4 FY20 Net Loss tells us that the current valuation is likely stretched. Investors should always look over the risk factors in a company’s prospectus before buying a new IPO. C3 stated that it has a history of operating losses, and unpredictable sales cycle, and intense competition, among other risk factors. With that said, it’s a stock worth watching going forward thanks to the massive potential of artificial intelligence technology.
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