Hargreaves Lansdown (LON:HRGV) offers a fascinating look into five IPOs that could be coming in 2021. As they point out, an Initial Public Offering (IPO) is a process through which a private company offers its shares of capital stock on a public equity market, listing as a tradable stock on that market. There are many reasons for listing a company, among which are that a company’s growth prospects may be so big that it cannot raise on private markets the funds needed to attack its addressable market. Another common reason is to reward existing investors by allowing them to sell their stake in the business. Sometimes, a company may also need to pay down debt and listing is the easiest way for it to be able to do so. Often, there is a combination of reason for listing.
An IPO has not happened until it has happened. As we have seen from the dramatic change in fortunes at Ant Financial’s failed monster IPO, a lot of things can go wrong that either prevent a listing completely, or significantly delay it, or, mean the IPO price falls far short of expectations. That said, investors do do a lot of work to ensure that the big IPOs arrive behind a lot of publicity. Of course, the IPO process has come under a lot of scrutiny, but it remains the most popular and perhaps best way for private companies to raise funds.
In judging an IPO, two things are important, the prospectus and the price.
The prospectus is similar to the offer document that describes the company, gives detailed financial accounts, as well as any other information that a reasonable investor would want to know before taking up the offer to invest. The prospectus is similar to the annual reports that already publicly traded companies release to the general public. Their purpose is to educate the investor and level the playing field so that the general public has enough information to make intelligent decisions.
A great company is not always a great investment, because returns are a function of share price appreciation (as well as free cash flow growth), and so, it is important to buy shares at a price that is at a discount to some estimate of the value of the business.
With that in mind, Hargreaves Lansdown looks at the five big IPOs of 2021:
- Bumble,
- Instacart,
- Nextdoor,
- Deliveroo and
- Darktrace
In keeping with the digital transformation that is sweeping the world, these are all digitally-enabled businesses. Bumblee is a dating app; Instacart is a grocery delivery platform; Nextdoor is a social media app that links people living within the same neighbourhoods; Deliveroo is a British takeaway delivery platform; and Darktrace is a cybersecurity firm.
Bumble is unique in that it attempts to put women in control of the dating process and so, women have to initiate contact in order for a dialogue between users to take place. Each user sets up a dating profile and is matched with various options and if they like any of them, they swipe right and if the user whose profile you swiped right, also swipes right, Bumble plays the matchmaker and they are set up for a chat and perhaps a date. The company, which is already profitable, is reportedly targeting a $6 billion to $8 billion valuation.
Although Instacart is a grocery delivery platform, it has started to add other products to its offering. The business model is similar to that of DoorDash (NYSE:DASH), Grubhub (NYSE:GRUB), Uber Eats (NYSE:UBER) or Deliveroo, in that it matches local shoppers with local merchants, providing fast delivery to shoppers and a huge clientele for merchants.
The delivery business is generally profitless, despite rapid revenue growth, so it will be interesting to look at Instacart’s numbers. The company is rumoured to be seeking a $30 billion valuation.
Nextdoor has had a great pandemic, as people have looked for new ways to connect. Users create profiles and try and meet other locals, and they can share information, such as prospective land investments in their communities, or the best places to go out and eat, on the social network. The company has already reached 25% of neighbourhoods in the US, but we will only know in 2021 if its growth has been profitable. The company could be on to something because Facebook (NASDAQ:FB) is preparing Neighborhoods, a Nextdoor clone. The company is reportedly seeking a $5 billion valuation.
Deliveroo, because it is British, may seek a London listing. The delivery platform market is incredibly fierce, largely profitless as we said above, and the margins tend to be razor thin. Each competitor is essentially growing fast betting that they can become the dominant player in the market and earn profitability. Deliveroo has also done well during the pandemic as people have spent less and less time going out to eat. Reports suggest Deliveroo could seek a $4 billion valuation.
Finally, Hargreaves Lansdown looks at British cybersecurity firm, Darktrace, which uses artificial intelligence to detect threats and provides software and systems needed to protect against those threats. The company is likely to list in London, with reports suggesting a $5 billion valuation.