Are Trendy Mega-IPOs a Buy on Earnings?

2019 was a good year for the IPO market, bringing in a whopping $65.4 billion. This is a 3% increase from 2018. However, many of the IPOs Wall Street hyped up ended up being major flops. In fact, nearly 76% of companies that went public in 2019 lost money, and some of the most-hyped IPOs we’ll look at today are especially deep “in the red.”

You may recall that there was a lot of excitement surrounding Uber (UBER), Lyft (LYFT), Beyond Meat (BYND) and Peloton (PTON). However, they’ve come under significant pressure since going public (we’ll talk more about this in just a moment). Now that these companies have released their first-quarter results, let’s see how the numbers stack up.

Uber Technologies, Inc. (UBER)

UBER dominated the ride-sharing industry. The company raised $8.1 billion and was considered one of the largest IPOs ever. The stock opened at $42 and rose as high as $45 in its first trading day. The company had a whopping $75.5 billion market cap.

However, Uber’s lofty ambitions may have been its downfall. It wanted to offer a broad mix of services, similar to Amazon (AMZN). The company already offers a meal delivery option called Uber Eats in addition to the ride-hailing service. UBER also wanted to try freight shipping and even a program to rent kitchen space to delivery-only businesses on the apps.

Unfortunately, this caused Uber’s losses to widen even further, leaving investors worried that the ride-sharing market won’t be enough to keep the company profitable. Uber is down 21% since going public last year and up about 10% year-to-date.

While some might blame the coronavirus for the stocks’ underperformance, the reality is that UBER was struggling well before the pandemic hit. You can see this in the company’s first-quarter earnings report.

First-Quarter Earnings Results, May 7, 2020:

  • Revenue: Beat expectations of $15.27 billion; actual was $15.78 billion
  • Earnings per share: Missed expectations for a loss of $0.99; actual was a loss of $1.70 per share

The company had a net loss of $3 billion in the first quarter, even though revenue was higher than expected. The stock was up a little over 6% on Friday, mainly due to the increase in demand for delivery services because of the pandemic. Uber Eats saw a 52% rise in the first quarter while the ride-sharing service itself dropped 5%.

Lyft (LYFT)

Uber’s main ride-sharing opponent, Lyft, went public in March 2019. It was initially priced at $72 per share, giving the company a $24 billion market valuation. The company raised the third highest amount of 2019, at $2.6 billion. The stock opened 21% higher at $87.33, but it’s been downhill ever since. In fact, the company’s valuation has been almost cut in half. Profitability has been an issue, which was evident in the company’s first-quarter earnings report.

First-Quarter 2020 Earnings Results, May 6, 2020:

  • Revenue: Beat expectations of $893 million; actual was $955.7 million
  • Earnings per share: Missed expectations for a loss of $0.62; actual was a loss of $1.31 per share

The company did see a 3% rise in active riders to 21.2 million in 2020, despite the impacts to travel due to COVID-19. Even so, Lyft’s core business was down 75% year-over-year in April.

The stock jumped about 17% after hours on Wednesday, due to its revenue beat and rise in active riders, but the stock sits around $33 today, less than half of its IPO price.

Beyond Meat, Inc. (BYND)

Initially priced at $25 per share, the plant-based protein company Beyond Meat raised $240 million for its IPO. The stock price doubled on the first day of trading, and by July 2019, was valued at $225 per share – a huge 920% increase. In the third quarter of 2019, the company reported its first ever profit, with sales up over 250%.

First-Quarter 2020 Earnings Results, May 5, 2020:

  • Revenue: Beat estimates for $88.2 million; actual was $97 million
  • Earnings per share: Beat expectations for a loss of $0.07; actual earnings were $0.03 per share

Company management noted that pandemic provided a heightened sense of necessity for plant-based proteins because of the nation-wide meat shortages, but it still pulled its full-year 2020 guidance over the uncertainty of the coronavirus’ future impact on the business. While the business turned a profit for the first quarter, the company remains overvalued with an $8.21 billion market cap. As such, it could be due for a steep pullback in the coming quarters.

Peloton (PTON)

Finally, we have the subscription-based exercise bike company, Peloton, which was offered at $29 per share and raised $1.2 billion for its IPO. However, the stock has slid over 11% since its IPO, due to many investors’ hesitancy to back a pricey service based on the consistency of fickle workout enthusiasts.

First-Quarter 2020 Earnings Results, May 6, 2020:

  • Revenue: Beat expected $486 million; actual was $524.6 million
  • Loss per share: Missed expectations for a loss of $0.18; actual was a loss of $0.20 per share

Peloton product revenue was up 61% from last quarter, and the company actually raised its full-year guidance for 2020 to between $1.72 billion and $1.74 billion. This came in well above analyst consensus for $1.56 billion.

The stock rose about 17% after the earnings release, but it is important to remember that their success could be purely centered around the pandemic. Due to the stay-at-home orders, folks can’t go to the gym right now. However, once gyms open back up, demand for the Peloton bikes could taper off a bit.

Another red flag is that the founder sold his stake in PTON right after the stock went public. So, if he doesn’t want to own the stock, why would want to own the stock?

The Bottom Line for IPOs in 2020

The IPO market has essentially dried up in 2020, as there has been an historically slow first quarter with postponements due to the novel coronavirus. Since the fourth quarter of 2019, there’s been a 35% in IPOs. For the first quarter of 2020, only 35 companies went public during the first quarter. This makes up 15% from the same time last year.

The reality is IPOs may look promising, but they don’t have a proven track record and plenty are burning cash. This makes them more risky and volatile.

This is why we focus on only fundamentally superior growth stocks. These are the types of growing companies that investors will rotate to as Wall Street looks past the hype and focuses more on the companies’ fundamentals.

Case in point: My number-one cybersecurity play released strong earnings this week that, unlike most of these flashy IPOs, topped analysts’ expectations on both the top and bottom line. This is a unique company, as it is involved in protecting a wide range of tech, from cloud computing to the Internet of Things (IoT) and uses artificial intelligence (A.I.) to do so.

Since my recommendation in August 2018, the stock is up more than 50% on my Growth Investor Buy List. And I see plenty additional upside ahead, thanks to increased demand for cybersecurity. To learn more about this stock, you can sign up here. Once you do, you’ll receive my special report called The One A.I. Company Set to Corner the Booming Cybersecurity Industry – absolutely free.

Note: Another A.I. stock set to corner its industry actually provides the technology for other major tech companies, like Microsoft (MSFT) and Google (GOOGL).

I call it the A.I. Master Key.

The A.I. company makes the “brain” that all A.I. software needs to function, spots patterns and interpret data.

The company reports earnings later on this month. I expect the company to release strong results that should drop kick and drive its shares higher. So, now is the perfect time to get in early before it really takes off.

I’ll tell you everything you need to know, as well as my buy recommendation, in my special report for Growth Investor, The A.I. Master Key. The A.I. stock is currently sitting pretty with an over 70% return on my Growth Investor Buy List, but it is still under my buy limit price – so you’ll want to sign up now; that way, you can get in while you can still do so cheaply. (And earn a dividend to boot!)

Click here for a free briefing on this A.I. innovation.

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