IPO investing can be quite risky. Stocks tend to be highly volatile in their early months as public companies, and many are unprofitable businesses whose value is based on growth potential.
While many IPOs aren't great choices for long-term investors, there are some recent ones that look promising. We asked three of our Motley Fool contributors which recent IPOs are on their watch lists, and here's why they're keeping an eye on StoneCo (NASDAQ:STNE), Pinterest (NYSE:PINS), and GreenSky (NASDAQ:GSKY).
Amazing growth from this Brazilian fintech
Matt Frankel, CFP (StoneCo): StoneCo is a Brazilian-based fintech, providing payment processing and other financial services for businesses. While it isn't a perfect comparison, the business model isn't that different from Square (NYSE: SQ) in the sense that StoneCo is trying to build a business financial ecosystem. With a market cap that's roughly 15 times the company's annualized revenue, StoneCo might look expensive at first glance, but I think the exact opposite is true.
Its growth has been extremely impressive. In the second quarter, the company's revenue grew by 69% year over year, and net income nearly tripled. Total payment volume and the number of active clients grew by 61% and 80%, respectively. The subscription business is performing exceptionally well, with the number of software service clients more than doubling since the first quarter.
It's also worth noting that Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) is one of StoneCo's largest shareholders, with a stake of about 11%. Clearly, whoever made the investment for Berkshire (one of Warren Buffett's trusted stock pickers) sees the long-term potential here. If it continues to grow at the current pace for much longer, the seemingly high valuation of about 45 times expected 2019 earnings could prove to be quite a bargain.
The new social media company on the block
Matthew Cochrane (Pinterest): Pinterest describes its platform as one that people turn to when they need inspiration for projects, ranging from cooking dinner and table settings to bathroom renovations and how to dress for special occasions. The company believes its platform helps its users, called Pinners, go on a "visual discovery journey" as they browse the ideas (Pins) other users have posted. The company likes to say, "Pinterest is the productivity tool for planning your dreams."
Since going public this past April, the stock has taken shareholders on a wild ride, filled with dramatic falls and heady spikes. Despite the bumpy ride, after the company reported strong second-quarter earnings, the share price sits near all-time highs, having appreciated 37% since its debut.
In Q2, revenue rose to $261 million, a 62% increase year over year. The biggest opportunity is in international markets, where the social media company is just beginning to gain traction with users. Its international revenue grew an astounding 199% year over year to $24 million. The two most important metrics for following this company are probably monthly active users (MAUs) and average revenue per user (ARPU). This quarter, MAUs reached 300 million, a 30% increase over last year's second quarter, and global ARPU rose to $0.88, a 29% growth rate.
Dan Caplinger (GreenSky): It's hard for consumers to afford high-priced goods and services, but trying to get financing for those items can be extremely challenging. Even if you can get a personal loan to make those purchases, the process can introduce long delays in getting what you need.
That's where GreenSky comes in. The company, which came public in mid-2018, gives consumer borrowers access to lending institutions at the point of sale, making it possible for consumers to get the financing they need in a timely manner. With a primary focus on home improvement contractors and medical professionals, GreenSky has targeted big-ticket needs for which there's a lot of demand. The service allows merchants to sell more, consumers to buy what they want, lenders to make consumer loans with attractive features, and GreenSky to collect a lucrative transaction fee.
The stock hasn't had as much success as IPO investors had hoped, but the company is now looking at strategic alternatives that could potentially include an outright sale or a going-private transaction. With the stock price down substantially in the time that the shares have been publicly traded, now's a time to take a look at GreenSky and its prospects for recovery.