When a "hot" company conducts an initial public offering (IPO), it usually takes off like a rocket and gets a lot of attention. Other companies quickly sink for a variety of reasons. Certainly, stock prices can experience volatility after companies sell shares to the public for the first time.
An IPO is a good time to start following a company to see how its results come in and monitor if valuations change once the hype dies down. Among recent IPOs, these three companies warrant a place on your watchlist.
Peloton (PTON 3.60%) conducted its IPO last September, selling shares at $29. Since March, the stock price has exploded from around $20 to $70.
That's quite a run, but the company has yet to produce a profit under U.S. generally accepted accounting principles (GAAP). In the fiscal third quarter (ended March 31), its loss widened from $38.6 million to $55.6 million.
It does continue to sell its bikes and treadmills while signing up more subscribers to its fitness classes. Peloton nearly doubled the number of connected fitness subscribers on a year-over-year basis from 457,100 to 886,100, and passed the 1 million mark in May. It has garnered a loyal customer base, with a 93% retention rate. Revenue continues to grow rapidly, reaching $524.6 million in the first quarter, rising 66% versus a year ago.
The company has spent a pretty penny to acquire customers, though. Last quarter, Peloton's sales and marketing spending rose more than 50%. But management pulled this back in the fourth quarter since it had more people wanting its equipment than it could provide.
Can the company sustain this momentum? Launched in 2012, it has pricey offerings, with its stationary bike and treadmills starting at $2,245, and $4,295, respectively. Since we are now in a recession, if the economic pain is extended, the high price tag may prove out of reach for many people and Peloton might see a pullback in demand.
Nonetheless, it deserves monitoring. If the company can prove it can continue growing revenue and produce a profit, and its valuation becomes more reasonable than the current price-to-sales ratio of 10, it could signal it's time to jump in.
2. Warner Music Group
Warner Music Group (WMG 0.18%) just completed its IPO a couple of months ago at $25. In that brief time, the shares have gained more than 20%.
Its record labels include Atlantic Records, Warner Records, and Elektra Records, with renowned artists like Ed Sheeran and Bruno Mars. There are two parts to its business: the recorded music business, which accounts for more than 85% of Warner Music's revenue, and music publishing.
This was working out well for Warner Music, which had been growing revenue by double digits. Its fiscal 2019 (ended Sept. 30) revenue growth was 12%. However, its profit slipped from $312 million to $258 million.
It is a different story this year, though. Looking at the first half, before the pandemic started materially affecting results, revenue was only 1% higher.
You can watch this company to see if this was merely a hiccup. If Warner Music can reinvigorate revenue growth and the valuation (its trailing price-to-earnings ratio is over 100) becomes more reasonable, this iconic music label is worthy of your consideration.
3. Rocket Companies
Rocket Companies (RKT 2.04%) just sold shares to the public a couple of weeks ago. The mortgage provider completed the IPO at $18 and the price swiftly rose by more than 30%.
However, this wasn't a smooth process, with management cutting the price and number of shares before the offering. With the economy in the doldrums, which could affect home buying and mortgage applications, you should proceed with caution. Watching developments from afar is the prudent course of action right now.
In business since 1985, Rocket launched its online platform five years ago. This aims to make the process of getting a mortgage simple and fast. Revenue went from $3.8 billion to $5.1 billion, a 6% compounded annual rate.
This was achieved when the economy was humming along. In a recession, if home purchases and mortgage refinancing activity dries up, this will hurt Rocket's revenue. Management has done a nice job increasing its market share, which went from 1% in 2009 to over 9% at the start of the year. If the company can garner a larger slice of the market, this makes it stronger when the recession ends.
I advise putting Rocket on your watchlist while you wait to see how developments unfold.