When a company has its IPO (or initial public offering) it is the first time that ordinary investors have the opportunity to buy a small portion of the company. As I will cover later, investing in IPO is not for everyone. The actions of the new IPO companies can often go up or down to dizzying levels during their first months in the market.
Drink Beyond meat, for example. The company, which offers plant-based meat alternatives that are increasingly popular in fast-food chains, went public on May 2. The shares started trading at $ 25 each. Less than two months later, they were exceeding $ 200. That's crazy: an investment of $ 15,000 was worth $ 120,000 in a matter of weeks. We will have to wait to see where the long-term actions are going.
Of course, the first days are not always so attractive. Come back when Facebook went public in 2012, the shares lost more than 50% of their value in less than four months. That could have scared investors away from stocks, which would have been a big mistake: Shares earned more than 1,000% over the next six years.
Image source: Getty Images.
As you can see, stocks can become volatile right after they start trading publicly. That can make the actions in an IPO recently testing their nerves. In fact, we have spoken extensively here in The Motley Fool about the dangers of investing in the first day of negotiation: things can become so volatile that it is better to wait a few days or weeks to submerge.
And I'm not a big fan of "big" stock purchases recently in IPO. These are companies that have a limited operating history. Most people are starting to kick the tires. If you do not have a solid thesis to invest in the stock, a set of metrics to prove your thesis and the conviction to maintain regardless of what you are doing the stock, is not for you.
But that does not mean you should avoid IPO actions recently. This is where I can help. Next, I will badyze five actions that have had their IPO since January 1, 2017. For each one, I will describe what the company does, why I believe in it and how it can verify if the company is delivering
Equally important, I have my own mask in the game: I own shares of the five companies.
|Company||Date of IPO||What does|
|Okta (NASDAQ: OKTA)||April 2017||It helps companies manage access to documents online.|
|Roku (NASDAQ: ROKU)||September 2017||It provides a platform for all your transmission services.|
|MongoDB (NASDAQ: MDB)||September 2017||Enables databases and search capabilities for companies.|
|Zuora (NYSE: ZUO)||April 2018||It offers billing solutions for subscription companies.|
|PagerDuty (NYSE: PD)||April 2019||It helps to respond to technical interruptions in websites and servers.|
Okta: Managing identity in the cloud.
The cloud, or the global network of servers connected to the Internet, stores more vital data than we could imagine. And the large volume of such important data, which includes things like your Social Security number, the health screening test results and the proprietary information, will only increase. Secure access to that data is paramount, and that's where Okta comes in.
This is a software as a service (SaaS) company that helps companies manage which employees and customers have access to data hosted in the cloud. As you can see below, the popularity of Okta offers is not in doubt, especially among customers who are willing to spend more than $ 100,000 per year.
Data source: SEC filings. Table by author.
It is worth noting that the 2019 figures in that table only take into account the first three months of its fiscal year, which began on February 1. Since 2015, the total number of customers has increased by 39% per year. More importantly, and impressively, the number of annual contracts of more than $ 100,000 has increased 59% by year.
Okta benefits from two pits that distinguish it from its competitors. The first comes from the high "costs of change". Once a company starts using a standard Okta tool, such as single sign-on or multifactor authentication, it depends on the service. Over time, customers start using more Okta tools to help keep their data safe and for employees and customers to have access to the data. In total, Okta has 12 different products, although this number will surely grow.
As customers add more Okta services and use them more, it is expensive to switch to an Okta competitor. Doing so could not only be financially expensive, but would also require retraining employees and re-entering data permissions in general.
The best way to measure Okta's success to integrate more and more deeply into the DNA of clients is to monitor the company's retention rate in dollars (DBRR). This measures the total amount of revenue that a cohort of clients spends from one year to the next. By filtering the effect of New customers, we have an idea if customers are staying with Okta (DBRR close to 100%) or even adding more services (DBRR above 100%).
Here are the results so far.
Data source: SEC filings. * DBRR for the end of 12 months at the end of the first quarter of fiscal year 2019.
As if that were not enough, Okta also benefits from "network effects": each new additional user makes the service more robust for existing users. This is because the company uses "progressive" user profiles to make sure that people on the Internet are who they say they are.
This type of profiles requires artificial intelligence and automatic learning (AI / ML). Things like AI and ML become much more powerful, and precise, when they have more data to learn. Each additional customer adds to Okta's superiority in the progressive creation of user profiles, an elegant way of saying that the way Okta identifies users is always changing as it gathers more data. This makes it much more difficult for the competition to catch up.
I think there is still a lot of room to grow. The company has a value of $ 15 billion for today's investors, but thanks to the dual pits and the huge tailwind of data migration to the cloud, I think we could look back in five years and consider the actions today as a robbery.
Roku: more than you know
Roku may be the only company on this list that most Americans are familiar with. The company sells a $ 30 USB plug-in that allows you to access all of your streaming options from an interface on your TV. If you have a Netflix account, use Amazon For video rentals or Prime streaming, like watching PBS with kids and uploading to YouTube when you're bored, you can do it all from the Roku interface.
On the surface, this does not seem to be a very good business to make money. But there are many things going on behind the scenes. Outside of those USB memories, or televisions that are sold with the Roku platform installed automatically, the company has three other sources of income:
- If a Roku user registers for a new broadcast service, Roku gets a small part of that subscription.
- Any purchase or rental of movies (such as an Amazon rental) made on the Roku platform contribute a little to Roku's income.
- If someone sees content backed up by ads using Roku, the company gets a cut of each ad impression.
The second element on that list is probably the least significant. The first item on the list may also seem weak, but we're about to see how that can change. Roku should reach 30 million customers by the end of 2019, and Disney it is scheduled to come out with its own broadcast service later this year, available at Roku. If any of those 30 million enroll in the Disney + service, it will appear in Roku's income statement, although the details are unclear on how big the cut will be.
But, by far, the most important contributor is advertising-backed revenue. If you watch YouTube or any other similar service on Roku, each additional viewing hour means cash for Roku.
Three key metrics will help investors monitor how well Roku is monetizing its growing user base: total accounts, hours transmitted (remember, more hours usually means more ads) and average revenue per account.
|Metric||Q1 2017||Q1 2018||Q1 2019|
|Hours transmitted (billions)||3.3||5.1||8.9|
|Average income per account||$ 10.04||$ 15.07||$ 19.06|
Data source: SEC filings.
The key to consider here is the leverage that Roku gets from the transition to the transmission. While customer accounts grew by 106% from the first quarter of 2017 to the first quarter of 2019, the number of hours that increased increased much more: 170%.
There is no way to know how many of those billions of hours of transmission were spent on advertising channels. But even if they were not, Roku is collecting data on viewing habits that he can then use to deliver more specific ads. That data is pure gold. Even if you collect data about users who do not see programs with advertising support, you can cross-reference those who share similar viewing habits and see programs with advertising support, which makes the orientation more solid.
It may seem that Roku is in a precarious place in the value chain: it has relatively little content and simply serves as a place to access all its content. But it is a powerful one. aggregator of the spectators. The streaming services know that by putting their services on Roku, they get instant access to 30 million viewers. No one else can offer that.
Such a huge advantage leads to network effects: the streaming services put their content in Roku due to all the users, and the users choose Roku because of all the services, and the unique and cheap payment of $ 30 for the platform.
Roku is still worth only $ 12 billion. With the mbadive shift towards continuous transmission and a powerful position as an aggregator that benefits from the effects of the network, I think Roku is an excellent investment at today's prices.
MongoDB: Organizing all types of data.
If you have not noticed so far, one of the topics of all these recent IPOs is the data. It is everywhere, and it is extremely valuable. Being able to store, search and badyze that data is paramount: companies that can do that capitalize on opportunities that the competition did not even know existed.
For much of the last 20 years, such data was organized into something called "structured query language (SQL) databases". In simple English, this means that the data was stored in columns and rows.
But now, the data is much more complicated. It is found in documents, collections and many other different media. MongoDB is the market leader in organizing, badyzing and enabling the search of these NoSQL databases (not just SQL).
The company started by offering free downloads of its technology. The updates gave users access to more tools to help organize and use the data.
Then, in mid-2016, the company launched MongoDB Atlas, a fully managed cloud database that is available in all major cloud providers: Amazon Web Services, Of the alphabet Google Cloud Platform, and From Microsoft Azure.
In less than three years, Atlas already represents more than a third of the company's revenues. The growth has been nothing short of amazing.
Data source: SEC filings. Rounded figures to the nearest whole number. Table by author.
Incredibly, Atlas continues to grow by more than 300% per year at the end of the first quarter of fiscal year 2020! Equally important, the number of six-digit annual contracts grew 52% year-on-year to 598 at the end of April.
Like other companies on this list, MongoDB is protected by multiple pits. When companies start using MongoDB to store their data, the costs of change become very high. Nobody wants the headaches of data migration or the risk of losing critical mission information. In addition, MongoDB can continually test and add new products (such as Atlas) that are easily sold to existing customers.
It also benefits to a lesser extent from network effects. The more customers MongoDB has, the more data it will have about how those products are used. The competition does not have this data and allows the company to innovate continuously and offer new products.
I believe that the forces at play, and the increasing importance of badyzing a large amount of data, will make this stock a long-term winner.
Zuora: Billing is more complicated in the subscription economy
With Zuora, we have the first company in the list that does not have He impressed Wall Street with his results. Stocks have fallen more than 20% since it went public last year.
Before going into why that is the case, let's go back a little. The founder and CEO of Zuora, Tien Tzuo, was an executive of the original SaaS company. salesforce.com. While there, he realized how powerful the subscription business model was becoming. It ensures customers in long-term relationships with companies that are much deeper than a single purchase could achieve.
But while that differentiated business model was attractive, it came with its own set of obstacles. One has to do with the difficulty of changing a company's accounting practices to recognize revenue in an acceptable manner during the lifetime of a contract. Believe it or not, that can create huge headaches in accounting departments.
That's where Zuora's SaaS offer comes into play. Customers use Zuora Billing or Zuora RevPro to handle these duties and gain a better perspective of where their business is going. All software complies with the rules of the Board of financial accounting standards, so it solves most of the headaches.
As you can see, customers with annual contracts of more than $ 100,000 have been voting with their feet when it comes to software.
Data source: SEC filings. Table by author.
And do not worry about the recent plateau: the 2019 figure on this graph only accounts for a quarter of the data. In its current form, the number of these large spenders has increased from 242 at the end of 2015 to 546 at the end of March 2019.
But not everything has been a smooth navigation. Revenue growth has been drastically reduced, from 60% during the first quarter of the company as a public company to 22% today. However, I have written a lot about why this is a bit misleading: the subscription income is all long-term investors that really should be concerned. The income of "Service" that comes with the configuration of the clients has a very low margin and is only important insofar as it adds a valuable service that badures the clients. The total percentage of service revenues varies widely according to the quarter, depending on the incorporation of new clients during three determined one month period.
Data source: SEC filings. Table by author.
That said, even the growth of subscription revenue shows signs of fairly steep drops. This is where we must consider how difficult Zuora's task really is. MongoDB does not need to convince companies that data is important, and Okta does not have to convince companies that identity security is important.
Such is not the case in Zuora. Companies are by their very nature conservative. Changing the business model completely to focus on a subscription model is not an easy sale. While it may be the case that most companies adopt this format in the near future, it does not mean that they are enthusiastic about it.
Zuora needs to do his own evangelization. And based on the comments made during the last conference call with badysts, it seems that the newest members of the sales force are having a hard time winning converts. These setbacks are an integral part of investing in companies that are changing the way we do business. Sometimes, patience is needed with the way the process is developed. I think this is one of those cases.
For long-term investors, I still think it's worth devoting a bit of capital, for example, from 1% to 2% of your portfolio, to the company. The shares have already been defeated, and the company currently has an appraisal of only $ 1.8 billion, by far the smallest company on this list.
Zuora's dollar income withholding rate of 110% shows that clients are staying, so I think it's worthwhile to own a small amount of stocks today. If the transition to the underwriting economy is gaining ground, there are great rewards for shareholders.
PagerDuty: real-time response to important problems
Finally, we have one of the most misnamed companies in today's markets: PagerDuty. The company is a creation of founder and technology director, Alex Solomon.
When Solomon was an engineer at Amazon, he realized that when errors arose in the Amazon code, employees would be "warned" at all hours of the night to solve the problem. Often, only one or two people really needed to be alerted, but he would only realize that after hours of trying to solve the problem.
Armed with this knowledge, PagerDuty began with the aim of accumulating all the signals sent by the servers, finding a way to identify exactly where the problems were and notify them. only The people who needed to be notified.
Since then, the company's offers have grown: now it sells five different services. As you can see, they are proving popular among customers willing to shell out a minimum of $ 100,000 per year.
Data source: SEC filings. Table by author.
But here's the big problem: we are still very early in the history of PagerDuty. The company only became public a few months ago. Existing customers are adding new "seats" (read: permissions for employees to use a service) and services quickly.
That has led to a net retention rate based on dollars that is truly remarkable.
Data source: SEC filings. Table by author.
Like the other SaaS companies here, the high switching costs and network effect provide critical pits. However, unlike the other companies, the effect of the network is particularly strong here. It can be very difficult to badyze all the signals that PagerDuty collects about the performance of a company's online services. And once a problem has been identified, it can take time to adjust who to contact and how to fix it.
The AI and ML of PagerDuty are crucial to help streamline these services. And because the company is adding high value customers, it is also adding tons of AI and ML data to feed, thus improving performance as the system learns.
In essence, PagerDuty believes that one day it can offer a "weather report" for the Internet. In other words, you can monitor all the data you collect from all your customers and use them to accurately predict where and when service interruptions might occur. But since it is the only one that has access to the data, it is the only one that can offer this type of service.
It is difficult to know when PagerDuty would have enough data to be able to offer such a report. The most important metric to observe would be the number of clients with contracts of more than $ 100,000. Those would probably be the ones that provide the most data. Even if that goal of pie in heaven comes in more than a decade from now, it could be lucrative.
Imagine, if you wish, that only one meteorological station in the world can offer accurate weather forecasts. It is not difficult to imagine how profitable a station of this type would be. Fortunately for those of us who like to know the weather tomorrow without paying an arm and a leg, measuring our atmosphere does not work that way.
Measuring the internet, on the other hand, could. And by owning PagerDuty shares, I think we are left open to benefit from that possibility.
One last word about investing in new IPO companies.
As I said at the beginning, I own the five companies in my own portfolio. But I have never "backed the truck" to buy a large number of shares. IPOs are, by their very nature, volatile.
And SaaS actions like those highlighted here are very well valued. This is what I mean by this: the S & P 500 company average quotes approximately 2.2 times sales. The five companies represented here trade, on average, for a little more than 20 times sales.
On one level, this makes sense: all of these are small businesses that are growing much faster than the more mature members of the S & P 500, so investors are willing to pay more for stocks because they expect more growth. The SaaS business model also means that, over time, more sales are maintained as profit than in traditional business models. But we are also in unknown waters when it comes to such high valuations for entire sectors.
Because of this, I have bought in small portions over time, adding shares when the progress of each company has shown that my original thesis for the investment was still valid. Today, these five represent a relatively small part (13%) of my family's money invested.
There will be time to add stocks, and benefit from the appreciation of the price, in the future, if I am right. If I am wrong and the stock falls, I will be happy to have left my exposure to these five modest levels.
I suggest you consider adopting the same approach to buy such recent IPOs.