IPO stocks aren't for the faint of heart.
Most new issues underperform the broad market, a sign of the "creative destruction" of free markets as losers tend to outnumber winners, but that doesn't mean that investors should steer clear of IPOs. After all, stocks that hit it big deliver huge returns for early investors. For instance, you would be a millionaire now had you dropped $1,000 on Home Depot stock at its 1981 IPO.
The last two years have seen a bevy of new stocks hit the market, including a number of "unicorns" (start-ups with billion-dollar valuations). This has given investors plenty of options if they're looking for new stocks to follow. Keep reading to see why IPO investors may want to add Pinterest (NYSE:PINS), Luckin Coffee (NASDAQ:LK), and DataDog (NASDAQ:DDOG) to their watchlist.
A sort-of social media company
Though Pinterest functions in many ways like a social media enterprise with people sharing virtual pin-boards and the company reporting similar metrics as other social networks, Pinterest has long maintained that it is not a social media company. CEO Ben Silbermann has argued that people come to Pinterest to work on themselves rather than connect with others.
In other words, Pinterest is unique in the digital world but is still able to generate the same competitive advantages that other social networks can, such as network effects and switching costs. Pinterest is growing quickly. In its most recent quarter, revenue jumped 47% to $280 million on 28% growth in monthly active users, which reached 322 million. The company has also turned profitable on an adjusted basis, posting a profit of $6 million in the third quarter, and management raised guidance in its last two reports. Pinterest is on track to generate between $1.100 billion and $1.115 billion in revenue for 2019.
Pinterest has a long runway for monetizing its user base, as it was only selling ads in seven markets in 2018, and its revenue per user is still significantly lower than some of its peers. It also provides special value to advertisers since many users come to the site with an intent to purchase.
After debuting at $19 per share, Pinterest is only trading near $23 as of this writing, a sign that the market may be overlooking the opportunity in this stock. Over the long term, Pinterest could be a big winner if it can successfully tap the ad market.
A coffee chain growing like a weed
Luckin Coffee opened its first location in December 2017. Today, the company is worth $10 billion, making it the world's second most valuable publicly-traded coffee business, behind Starbucks but ahead of Dunkin'. The Chinese company is targeting a huge opportunity in the world's second-biggest economy, a country with over a billion people, where the average Chinese person drinks just a few cups of coffee a day. Luckin has grown rapidly by focusing on pick-up and delivery rather than the cafe experience and eat-in customers the way Starbucks has.
Revenue jumped a whopping 558% in its most recent quarter to $209 million as Luckin's total store count tripled to 3,680. By the end of 2019, it had reached 4,500 locations, topping Starbucks as the largest coffee chain in the country. The company isn't yet profitable, but its profitability has been improving as it reported a store-level operating profit margin of 12.5%. Its model also seems to be resonating with Chinese consumers as its stores are becoming more efficient and demand has supported its rapid expansion. Meanwhile, Starbucks has imitated Luckin's delivery model with a partnership with Alibaba.
While Luckin's meteoric growth is bound to slow, the company has a long runway ahead of it as coffee truly goes mainstream in China.
Every Datadog has its day
A review of recent IPOs wouldn't be complete without a look at a cloud computing stock, and Datadog, which hit the public markets this past September, fits the bill. Datadog's primary service is giving real-time updates to its clients' technology stacks, keeping them abreast of any issue that may arise across applications or infrastructure and alerting them. It's the kind of platform that is becoming ever more necessary in today's tech-dependent world, and the company sees itself as the leading monitoring and analytics platform.
In its only earnings report as a publicly-traded company, Datadog showed off 88% year-over-year revenue growth to $96 million. There were other promising signs for long-term growth, including the number of customers with annual recurring revenue of more than $100,000 nearly doubling to 727. The company also posted break-even adjusted profits for the quarter, something other cloud stocks have struggled to do, and Datadog said it had dollar-based net retention of more than 140% in its S-1 filing, a sign it's doing an excellent job of retaining customers and scaling up their business.
Like other SaaS stocks, Datadog is trading at a steep premium with a price-to-sales ratio of 40, but that shouldn't be surprising considering its top line will nearly double in 2019 (after doing the same the previous year). With its niche leadership in a fast-growing industry and strong fundamentals, Datadog could certainly be one of the big winners in cloud computing over the coming years.