Private companies enter the public markets full of promise. Unfortunately, many fail to live up to the initial hype. However, some far exceed expectations by enriching their investors from day one and never looking back.
Three upcoming IPOs that currently look intriguing thanks to their long-term upside are Saudi Aramco, Slack Technologies, and Beyond Meat. Here's why these three Motley Fool contributors think investors should add them to their watchlists.
The biggest IPO in history could soon happen
Matt DiLallo (Saudi Aramco): Saudi Arabia has been talking about taking its oil company, Saudi Aramco, public since 2016. The Middle Eastern nation only wants to sell a small 5% slice of its oil behemoth. However, it's seeking a jaw-dropping $2 trillion valuation for the company, meaning it could potentially haul in $100 billion in the IPO, making it the largest one in history.
However, the market balked at that value, due in part to oil price volatility and an unclear picture of how much oil the kingdom has in reserve. The country has started addressing those concerns as it continues prepping for an IPO. For starters, it's working with other members of OPEC as well as non-members like Russia to prop up oil prices. Meanwhile, it has started opening its books. An independent audit, for example, confirmed that it controls more than 260 billion barrels of oil reserves. Saudi Aramco also recently provided a glimpse at its financials, reporting that it recorded $111.1 billion in net income last year. That was more than the combined profits of Apple, Google, and ExxonMobil.
Saudi Aramco highlighted its financials so it could raise $10 billion in debt to fund the acquisition of a 70% stake in Saudi chemicals company Sabic. Demand for that debt was exceptionally high, which bodes well for interest in an eventual IPO.
These moves set the company up to eventually complete its long-delayed IPO. As things currently stand, Saudi Aramco could go public by 2021. Given its sheer size, profitability, and importance to the oil market, this is one IPO all investors should add to their watchlists.
Fast growth, big losses
Tim Green (Slack Technologies): Many high-profile, fast-growing, money-losing private tech companies have chosen 2019 for their public market debuts. Slack, a provider of messaging and collaboration software aimed at replacing email, will join that list in the coming weeks. Slack will eschew a traditional IPO, instead opting for a direct listing where existing shareholders can sell their shares to the public. Slack won't be issuing any new shares, and it won't be receiving any proceeds.
Slack is growing very quickly. Revenue more than doubled in 2017 to $220.5 million, then nearly doubled again in 2018 to $400.5 million. The company's software is popular, and that popularity prompted Microsoft to launch a similar offering, Teams, back in 2017. Competition hasn't slowed down Slack's growth rate, although it may make it tougher to turn a profit.
Like many young software-as-a-service companies, Slack is nowhere near profitable. The company booked a net loss of $140 million in 2018, and it posted a free cash flow loss of nearly $100 million. Costs are growing more slowly than revenue, which is a good thing, but don't expect the red ink to subside anytime soon.
Slack was valued at $7.1 billion the last time it raised money, and more recent private transactions have valued the company at around $16 billion. The latter valuation would put Slack's price-to-sales ratio at 40.
Investing in Slack at that price doesn't make much sense. But if the public markets rough up the stock, sending the valuation to more reasonable levels, Slack could start to look interesting to growth investors.
On the path to profits
Maxx Chatsko (Beyond Meat): This plant-based meat company is doing good for the planet by lowering the carbon footprint of protein consumption and is on the path to profits.
According to the start-up's S1 filing, the business generated $87.9 million in revenue and a gross profit of $17.5 million in 2018, compared to just $16.2 million in revenue and a gross loss of $6.3 million in 2016. That growth has been fueled by greater distribution of its products, including the fastest new-product launch in the history of restaurants such as TGI Fridays and A&W Canada. Beyond Meat products are now in 12,000 locations in the United States and Canada.
While Beyond Meat posted an operating loss of $28 million in 2018, about the same as the year before, continuing its rapid expansion should deliver the business to profitability soon enough. Considering it started this year with $54 million in cash and cash equivalents and expects to raise as much as $211 million from its IPO (no date has been set), it will have plenty of capital to stomach (shrinking) losses and plow into growth.
Individual investors with a long-term mindset might feel pretty good about staking a position in the company at its market debut.