2018 and 2019 have been hot years for the IPO market. Investor appetite for new and fast-growing companies has been voracious, and start-ups and their early investors have used all-time stock market highs to cash in. In the last couple months, though, talk of a recession has been on the rise, and some of that appetite for risk has tempered.
Recession or not, many new stocks still hold a lot of promise. For those in it for the long haul, Pinterest (PINS -2.03%), DocuSign (DOCU -0.98%), and Spotify Technology (SPOT -2.69%) are worth watching closely.
Digital social discovery picking up steam
Pinterest, the social media company that allows users to "pin" ideas and projects to a digital board, has built quite the following since its founding in 2010. The company boasts 300 million active monthly users around the globe, making it tiny in comparison to some of its social media peers. But Pinterest is still growing fast, and an expanding and highly engaged user base could make this another digital advertising powerhouse.
The company has cited figures from tech researcher IDC that predicts that spending on global digital advertising will be $423 billion by 2022, up from $272 billion in 2018 (good for double-digit annual growth). Total global advertising -- digital and offline -- is expected to be $826 billion in 2022, compared with $693 billion in 2018. The implication here is that things are quickly shifting online. Pinterest users are treating an online marketplace as they would a magazine or catalog, and the company is capturing eyeballs as the trend shifts.
It's a powerful platform, one that delivered 60% revenue growth in 2018 to $756 million. A similar pace has been maintained since the company's early 2019 IPO -- first quarter sales were up 54% year-over-year, and second quarter sales were up 62%, putting Pinterest on track to approach $1 billion in revenue this year.
Granted, Pinterest is still running at a loss. Free cash flow (basic profits after operating and capital expenditures are paid) was negative $71 million, and the current valuation of 16 times sales is the steepest on this list. But this stock is all about maximizing growth and worrying about profits later. With the social discovery platform growing fast and only just beginning to tap into its revenue generating potential, this one is worth keeping a close eye on.
Digital agreements in the cloud flying sky-high
Since going public in the spring of 2018, DocuSign has been off to the races. The stock is up over 130% from its IPO price, skyrocketing this year as the company reported especially strong results from its digital signature and agreement software. During the second quarter of 2019, 29,000 new customers were added, bringing the grand total to over 537,000 worldwide.
DocuSign is also on track to come close to $1 billion in sales this year. Through the first six months of the year, revenue grew 39% year-over-year to $450 million. While not of chief concern at the moment, adjusted earnings more than doubled to $0.08 per share, and free cash flow through the halfway point of 2019 was $42.3 million. This software company is growing fast, and high profit margins on services sold are promising signs that there is plenty left for this stock in the years to come.
DocuSign management is optimistic too. CEO Dan Springer said they see the potential for the digital signature and agreements industry to be "as big as CRM (customer relationship management) and ERP (enterprise resource planning) one day." For perspective, global spending on CRM was estimated by tech researcher Gartner to be $48 billion in 2018, and industry leader Salesforce.com does over $2 billion each quarter in its sales and service segments. DocuSign is ambitious, but its momentum is strong and new customers are signing up all the time. This one deserves to be on watchlists, too.
Music, podcasts, and more by subscription
Out of the three here, Spotify Technology's stock has performed the worst since its debut in early 2018 (technically, it wasn't an IPO since new shares weren't sold, existing shares were listed directly on exchanges for sale). The stock put up a decent rally through the first half of 2019, but ongoing worry over music streaming competition has shares back down to 23% below their first day closing price as of this writing.
Spotify has a big lead when it comes to global subscriber count, reporting 232 million monthly active users and 108 million paying subscribers in the second quarter -- a 29% and 31% year over year increase, respectively. Apple Music supposedly has surpassed Spotify in subscriber count here in the U.S., but its "over 60 million" makes it a distant second. As for Spotify, its user growth has equated to a 28% increase in revenue over the last year to $6.9 billion.
Spotify's strategy is still geared toward maximizing users and subscribers, doing so by increasing engagement with listeners and broadening its appeal with new services like podcasts. Ad-supported services are also still an early experiment. In the meantime, Spotify's streaming platform is churning out decent profitability for a growth company -- free cash flow was over $400 million over the last year. This one is also priced for future results, though, as most areas of the world have only just begun to discover Spotify and its streaming rivals. But with a price to sales ratio of just 3 times (compared with 16 and 14 for Pinterest and DocuSign, respectively), Spotify is similarly attractive.