Initial public offerings (IPOs) are making a comeback in 2017 as markets head higher, fueling investors' willingness to take a chance on new listings. Timing is on the side of new issuers, given that the S&P 500 index is already up more than 11% year to date.
Here's why Redfin, Torrid, and potentially Spotify could be some of the biggest IPOs of 2017.
The discount real-estate brokerage filed its S-1 with the SEC, pushing forward with plans to raise $100 million in an initial public offering.
Most real estate brokerages spend the majority of their time and effort chasing down new clients. Redfin's model is designed to have the clients chase its agents. It believes that a feature-packed website and model app can serve as a cost-effective funnel to lead prospective clients to its agents.
Cutthroat pricing doesn't hurt, either. Home sellers who use its service pay as little as 1% to 1.5% of the transaction price to sell their home vs. the traditional fee of 2.5% to 3%. For the business model to work, Redfin needs volume -- and lots of it. It guarantees a portion of its agents' earnings, paying bonuses to its employees based on sales volume. (Traditionally, real estate agents are self-employed, earning an income by collecting commissions on each transaction.)
Can Redfin eke out a profit while charging half as much as its competitors? Last year, the company lost $22.5 million on $267.2 million of revenue, but scale should theoretically lead to profit, given that many expenses are fixed -- building software for its agents -- rather than variable -- bonuses to agents that increase with transaction volume.
Redfin has hardly reached real scale. In markets where it has been in business the longest -- 10 markets it entered between 2006 and 2008 -- it has only 1.66% share, calculated by the value of homes sold. In its least-developed 55 markets that it opened in 2014 to 2016, the company has only 0.20% share.
Redfin's small size also means that it isn't yet a threat to the real estate industry, or its commission-based pricing. Full-priced agents still collect the vast majority of sales and new listings. While agents may find it unnecessary to compete against a smaller-sized Redfin on price, it's growth presents a challenge: Just how much business are traditional agencies willing to lose before they cut their prices, too?
If it seems like an odd time for a retail IPO, that's because it is. Many of 2017's biggest losers are concentrated in the retail industry, which is facing challenges driving sales and profit growth as customer traffic and offline sales slow.
But Torrid believes it has capitalized on a niche, becoming the largest plus-sized women's retailer in the United States. The S-1 reads as follows:
We believe we are the clear market leader for an underserved and growing demographic of young, plus-size women that no other national specialty retailer targets or adequately addresses. According to NPD, the women's plus-size apparel market was approximately $21 billion in 2016, and has grown at more than twice the rate of the overall U.S. women's apparel market.
In the year prior to filing, the company grew its store count to 510 stores, up from 394 stores at the end of April 2016. Sales volume has increased as stores age, with same-store sales growing 12% in the most-recent quarter. It expects to open approximately 95 new stores in 2017 and 45 new stores in 2018. The company highlights the fact that it's able to "to obtain attractive leasing rates and flexible lease termination rights" on new leases. To be sure, growing retailers have more negotiating power when it comes to signing new leases than they did just a few short years ago.
Torrid uses vanity sizing to create loyal customers. Its 00 size -- the smallest -- is the equivalent of a size 10 using traditional women's' sizing. Torrid believes its retail stores give customers the opportunity to find their Torrid size and fit for repeat online purchases. The company noted that 86% of its net sales in fiscal 2016 were to members of Torrid Insider, its loyalty program that incentivizes repeat purchases with discounts and rewards for spending.
For Torrid, the challenge is convincing investors that the plus-sized market isn't just underserved today, but that it will remain underserved for a very long time to come. Outsized profits in competitive industries attract competition, and struggling retailers may eye an expansion into plus-sized clothing as an easy way to attract new customers to stave off sales declines.
After Snap's public debut, Spotify is one of the few remaining multi-billion-dollar private companies left for future IPO speculation. Unlike the others above, Spotify hasn't filed an S-1, however.
But increasingly, it appears that Spotify is prepping for a public debut. A shakeup in its board of directors, plus new and better terms with a major music label (Sony), could signal that Spotify is ready for its time as the next hot IPO. Some have speculated that reworked royalty deals include lower payments to the labels in exchange for provisions that keep new releases off Spotify's free service for two weeks after release.
On one hand, Spotify is a friend to the music business; on the other, it's a foe. It offers record labels a new source of recurring revenue, but also brings about the risk of cannibalizing the sale of digital and physical media -- singles on iTunes, or CDs sold offline.
Financials that it filed with the Luxembourg government show that the company hasn't yet reached profitability, partly due to the high cost of licensing music from the labels. In 2016, the company generated revenue of 2.9 billion euros, but sent just under 2.5 billion euros out the door on royalties and distribution. Product development, sales and marketing, and administrative expenses tallied to another 800 million euros. Operating losses stood at 349 million euros last year.
Spotify's primary challenge is growing large enough to have negotiating power with labels, but doing so at a pace that doesn't burn through its liquidity. The company ended 2016 with about 1.6 billion euros in cash, equal to roughly three times its pre-tax loss that year.
Could Spotify be the next billion-dollar IPO filer of 2017? Only time will tell.