Last year was a phenomenal year for IPOs, with various companies raising a record $167.2 billion. The previous record was set at the apex of the “dotcom bubble” ($107.9 million). Nearly half the amount in 2020 was raised by an uptrend of Special Purpose Acquisition Companies (SPACs), allowing the market to participate in private equity acquisitions.
The listing of Plantir and Asana continued the resurgence of Direct Listing. The year’s epilogue was the exhilarating IPO pops of Airbnb and Doordash. Airbnb had raised $2 billion in 2020 through debt and equity placement that valued them half their last private valuation. Merely eight months later, the Airbnb listing opened up 115% from its IPO price. Doordash surged 86% from its offering price and, along with Airbnb, opened up comparisons to the dotcom exuberance in the late 1990s.
The IPO market for 2021 promises to be equally exciting with big-name unicorns filing their S-1s with the SEC already and a few seriously considering one. Equity markets could remain the best game in town for return seekers, especially with other investments suffering due to record-low interest rates. So, here’s a look at give companies that will be angling to leverage these trends.
Already Filed an S-1
Coinbase
The biggest crypto exchange globally filed a confidential S-1 in December and is an attractive investor approach to exposure to the cryptocurrency markets. Coinbase’s revenues are primarily trading commissions. The acquisition of rivals Xapo and Tagomi enabled alternative revenue streams from prime brokerage services and custody for crypto.
BQ Intel estimates that Coinbase generated $543 million in revenue and $163 million in profit in FY2019, growing more than 25% from the FY2018 figures. Its 30% net margin is in-line with mainstream regulated exchanges.
New funding should help attract more users by patching up capacity problems that the exchange has faced in high demand scenarios. Along with IPO trends, there is further scope in revenue growth from the tremendous interest in cryptocurrency. This interest is mainstream with institutional investors with high return mandates flowing in. Coinbase’s institutional asset holding ballooned from $2 billion to $20 billion from April to November 2020. The endorsement of JPMorgan, which agreed to take Coinbase on as customers, should also assure investors.
Research company Messari has valued Coinbase at $28 billion, a significant increase from an estimated $8 billion in the latest round of funding in 2018.
Bumble
Bumble and its sibling app Bado reach over 600 million users. It generates revenue through the sale of in-app features. Bumble has grown from offering dating matches to one that also provides matches for social and business networking.
Bumble generated revenue of $240 million in 2019, exceeding its internal growth targets. Rival company Tinder’s parent Match has recently been spurned in their attempts to acquire Bumble for $500 million. Match Group is a strong competitor, with Tinder, Match, and OK Cupid in its arsenal. Success hinges on converting the inflow of free version users during the pandemic to purchasers.
The majority ownership was acquired by the Blackstone Group, which valued the company at $3 billion in November 2019. The 2021 IPO reportedly targets a valuation of between $6 billion and $8 billion.
Affirm
Following Airbnb and Doordash’s IPO pops, the consumer lending company delayed its 2020 IPO for fear of leaving cash on the table. The company offers consumers the option to pay for purchases in instalments. A large revenue source is their 0% APR loans, on which they get a fee from merchants.
Revenues doubled in the fiscal year ended June 30, 2020 to $509.5 million. Affirm also has been shaving its loss levels. The company saw revenue growth from the increase in interest in home and office products. The growth included an increase in the sales of Peleton, a home gym equipment merchant, which accounts for 28% of overall revenue. For context, the top 10 merchants account for just 35% of revenues. The dependence on Peleton is likely to influence investors, based on their opinion on what impact an economic recovery will have on lockdown spending habits.
There is significant room for growth. Ecommerce has grown in popularity, while traditional retail establishments have been closed. However, Buy Now Pay Later services that Affirm provides are used only in 1% of ecommerce US sales compared to 20% in Australia. This Australian market has been successfully tapped into by competitor Afterpay. Affirm will seek to emulate their rival in the US market.
The Wall Street Journal estimated a valuation of between $5 billion and $10 billion in July 2020.
Roblox
Another organization that delayed its IPO from 2020 is the company that owns and operates videogame platform Roblox. The platform is open to games designed by anyone, and designers can charge fees for in-game items and features. Charges are paid with in-game currency called Robux. Roblox’s revenue stems from selling Robux to users.
While Roblox has seen heavy losses, it generated $293 million in free cash flows in the first three quarters of 2020. This is a feature of its revenue model, which recognizes revenue only when the Robux sold are spent or converted to cash. For investors, this is a signal of smart tax planning by decelerating revenues and postponing tax liabilities.
Videogaming has been another beneficiary of the pandemic-induced lockdowns, but Roblox’s revenue depends on translating these users into buyers of Robux. However, Robux are a volatile revenue source as they depend on “spur of the moment” decision by gamers.
Reuters reported that Roblox believes the IPO would double their recent valuation of $4 billion.
Not Filed an S-1 Yet
Robinhood
After the initial slump, financial markets in 2020 have been extremely bullish and volatile. Analysts attribute much of this sentiment to the influx of retail investors. Robinhood’s commission-free trading platform has brought millions of retail investors to the financial markets. The pandemic brought the opportunity to attract young, often first-time investors searching for alternate revenue sources in uncertain times. It also attracted speculators and has been accused of “gamifying” the market.
The platform generates revenue from interest on lending cash deposits, premium accounts, and their margin lending facility. A significant source of income is payment from market makers to whom Robinhood directs customer orders. Robinhood was fined by the SEC on charges that they had relied so heavily on this order flow revenue between 2015 and 2018 that market makers were allowed to provide sub-par trade executions. The company says the issue has been rectified, but suspicion may be a significant deciding factor for new users.
Its latest round of funding in 2020 valued Robinhood at $11.7 billion, and reports suggest the IPO could be valued at $20 billion.
The year ahead is likely to see the continuation of several IPO trends established in 2020, as well as the volatility and apparent return of the IPO rally. It holds great promise for investors, underwriters, and issuers alike.
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