2020 was a record year for the US stock market.
With the optimism surrounding the stock market, 2020 saw a huge uptick in initial public offerings (IPOs) as well, setting a new high.
According to FactSet, the number of IPOs in 2020 more than doubled to 494, compared to the previous year. In all, IPOs raised US$174 billion in 2020, a 150% increase over 2019.
Fun fact: Special purpose acquisition companies (SPACs) accounted for 50% of all IPOs in 2020.
The flurry of IPO activities is continuing well into this year.
While IPOs may have plenty of promise, I tend not to invest in them as they are usually expensively-valued.
Among the recent IPOs, here are three on my watchlist. I might consider buying them after a year or so, provided my portfolio makeup permits and the companies still perform well under public scrutiny.
Company #1: Coupang
|11 March 2021
Coupang is the largest e-commerce company in South Korea which was founded in 2010 by Harvard business school dropout Bom Kim.
Often referred to as the “Amazon of South Korea”, it offers customers a wide selection of items across almost every category of goods, from tomatoes to TVs.
And just like Amazon, Coupang has a relentless customer focus.
Coupang’s customers are promised free, next-day delivery for orders placed any time of the day — even seconds before midnight.
Imagine ordering something just before you sleep and finding it right at your doorstep once you wake up the next morning.
Don’t like the product you bought? Fret not.
You can simply tap a button on the Coupang app and leave the item outside your door for pickup, without needing to repack the item or print a return label. Refunds are done the moment the item is picked up at your door.
With such customer obsession, Coupang’s well on its way to fulfilling its mission:
“To create a world where customers wonder: “How did I ever live without Coupang?””
Coupang’s business model reminds me of Costco’s.
Coupang mentioned in its Form S-1 filing that it has significant scale economies to generate cost efficiencies to allow it to pass any savings to its customers in the form of free shipping and low prices.
Similarly, Costco is able to sell goods at the lowest price possible due to cost efficiencies.
Financials-wise, Coupang is still loss-making as it’s ramping up for growth. However, its losses are narrowing.
In 2018, it made a loss of US$1.10 billion, but that has shrunk to US$474.9 million in 2020.
Free cash flow (FCF) has been improving over the years too, from a negative US$787.6 million in 2018 to US$182.6 million in 2020. Coupang’s long-term goal is to maximise its FCF.
FCF is money that can be used to reinvest into its own business, acquire other businesses, and buy back its own shares, among other things.
There’s still plenty of growth ahead for Coupang.
Total e-commerce spend in Korea was US$128 billion in 2019, and this is expected to grow to US$206 billion by 2024. This is a tiny drop compared to Coupang’s 2020 total net revenues of around US$12 billion.
Company #2: Roblox
|10 March 2021
Roblox is a video-game platform that hosts an average of 36.2 million people worldwide each day.
Its platform is powered by user-generated content, built by its community of nearly seven million active developers.
Players use core building components to create and share online worlds that anyone can explore, usually called the “Metaverse”.
The term was coined in a 1992 science-fiction novel Snow Crash, where it served as a virtual-reality-based successor to the internet.
Roblox mostly makes money through the sales of Robux, its virtual in-game currency.
Players who choose to purchase Robux can spend the currency on experiences and on items for their in-game character.
Developers and creators earn Robux by building engaging experiences and items for users to purchase. Those in-game earnings can be converted back into real-world currency.
Over 1,050 developers and creators on Roblox have earned US$10,000 or more and nearly 250 of them have earned at least US$100,000.
Roblox benefits from having a network effect.
As developers and creators build more highly-engaging content, more users are attracted to its platform.
The more users on the Roblox platform, the higher the engagement and the more attractive Roblox becomes to developers and creators.
With more users, more Robux are spent on the platform, encouraging developers and creators to design even more engaging content and enticing new developers and creators to start building on its platform.
Roblox is not yet profitable but it’s FCF positive, which is great.
FCF for the nine months ended 30 September 2020 has ballooned to US$292.6 million, up from US$6.0 million a year ago.
Roblox believes there is still significant potential for it to grow by increasing its engagement across all age groups and by reaching more international users.
Around 50% of its users are under the age of 13 while 70% of its sales activity are from the US and Canada currently.
ARK Investment Management, which invests in companies in the disruptive innovation space, sees potential in Roblox as well.
ARK’s Next Generation Internet ETF (NYSEARCA: ARKW) bought 520,742 Roblox shares in total after the IPO, making up 0.5% of the ETF.
(If you want to listen to ARK founder Catherine D. Wood’s take on disruptive innovation, do grab your tickets for the Seedly Personal Finance Festival 2021 where she’ll be speaking!)
Company #3: Unity
|18 September 2020
Unity, which was featured as one of the top six tech IPOs to watch in 2020, prides itself in being the world’s leading platform for creating and operating interactive, real-time 3D content.
In the fourth quarter of last year, games made with the Unity platform accounted for around 70% of the top 1,000 mobile games.
Unity is also the leading platform for creating content for augmented reality and virtual reality applications.
Overall, Unity has a sticky business going for it since it has a history of strong growth in its customer base.
Customers contributing over US$100,000 of revenue has grown steadily in the past.
And its customers are also staying around and spending more money on Unity’s platform, as seen from the dollar-based net expansion rate (DBNER).
The DBNER figure measures expansion in the revenue of Unity’s existing customers over a trailing 12-month period. Anything above 100% is great.
Unity believes its total addressable market to be US$29 billion across both gaming and other industries. With total revenue of just US$772.4 million in 2020, there’s a long growth runway for the company.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.