The market for companies going public has been heating up this year on the heels of the rapid-fire bear market and subsequent recovery. After losing 30% of its value between mid-February and late March, the tech-heavy Nasdaq has led the recovery, gaining a remarkable 67% since hitting its bottom on March 23 and up a more than healthy 28% year to date.
Additionally, many of the best-performing stocks over the past several months have been technology issues. Remote work and stay-at-home orders have helped particular sectors of the market prosper, including e-commerce, cloud computing, streaming video, gaming, and telemedicine -- and have helped lead tech higher.
This has led many privately held technology companies to rush to join the public markets, hoping to take advantage of the current tech gold rush. While there are plenty of upcoming initial public offerings (IPO) to choose from, here are a few with the greatest likelihood of success.
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1. A special little Snowflake
Cloud data management specialist Snowflake partners with -- as well as competes with -- Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. The company provides data warehouse software that helps businesses store and manage information in the cloud.
What makes Snowflake a must watch is its meteoric revenue growth. In the most recent fiscal year, Snowflake reported revenue of nearly $265 million, up 173% year over year. That hectic pace continued this year, as revenue grew 133% year over year for the first six months of 2020. Snowflake was also able to trim its losses to $171 million, down from $177 million in the prior-year period.
Customer metrics are also robust. During the first six months of 2020, existing customers grew to 3,117, up 101%. Even more impressive is that those clients that contributed more than $1 million over the trailing-12-month period grew a massive 154%.
Snowflake announced in a regulatory filing on Tuesday that Warren Buffett's Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) and salesforce.com (CRM -0.57%) would each invest $250 million in conjunction with its IPO, while Buffett would also buy an additional $4 million shares from a current shareholder, with the total value of the investment potentially exceeding $500 million.
With numbers like that, you're probably going to want to take a closer look at this pretty little Snowflake.
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2. PayPal co-founder Peter Thiel's Palantir
Tech guru Peter Thiel has quite the Silicon Valley pedigree. Not only was he a co-founder of PayPal, but he was also among the first investors in social media titan Facebook -- well before it became a household name. Thiel's background makes his latest venture a must watch.
Palantir Technologies creates cloud computing platforms for government defense and intelligence agencies, allowing them to apply sophisticated algorithms and artificial intelligence to the data to extract actionable information.
For 2019, revenue of $743 million grew 25% year over year, while its net loss remained unchanged at about $580 million. There was a marked improvement for the first six months of 2020, with revenue of $481 million increasing by 49%, while Palantir dramatically trimmed its loss by 41% to $165 million, much improved from a loss of $280 million in the prior-year period.
It's worth noting that Palantir will forego the traditional IPO in favor of a direct listing, making it potentially more volatile. However, given the background of its visionary leader, investors will want to pay attention to the company's upcoming debut.
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3. Leading telehealth provider American Well aka Amwell
With the onset of the pandemic, the use of telehealth and telemedicine has skyrocketed, as patients sought to avoid a trip to the doctor's office waiting room for fear of contracting the virus. With that as a backdrop, it's no coincidence that American Well is now looking to join the public markets.
The company, also called Amwell, provides its telehealth services to 55 health plans and 36,000 employers, as well as 150 health systems covering 2,000 hospitals. This resulted in 5.6 million telehealth visits to date, with more than 2.9 million in this year alone.
After generating revenue growth of 31% in 2019, Amwell's growth rate more than doubled during the first six months of 2020, with revenue of $122 million, up 77% compared to the prior-year period. Unfortunately, its losses also soared to $113 million from $42 million. For comparison, for the first six months of 2020, rival Teladoc Health grew revenue to $422 million, up 63%, while losses edged lower from $59 million to $55 million during the same period.
With the potential to ride the wave of accelerating adoption of telehealth, Amwell's worth a look.
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4. This (J)Frog can jump
JFrog makes tools that enable software developers to implement automatic software updates. While it certainly isn't a household name, JFrog's customer base of 5,800 organizations includes 75% of the Fortune 100 companies.
The company is also developing an impressive financial track record. For 2019, JFrog generated revenue of $105 million, up 65% year over year, while narrowing its losses from $26 million in 2018 to just $5 million in 2019. The news got even better during the first six months of 2020, as revenue of $69 million grew 50% year over year and the company cut its losses to just $426,000.
Customers that generate more than $100,000 in annualized recurring revenue (ARR) increased to 286, increasing 56% and 45%, respectively, during the first and second quarters of 2020. JFrog also has eight customers generating ARR of more than $1 million, up from only one in 2018. Not only is the company's customer base growing, but existing clients are spending more. JFrog's net dollar retention rate topped out at 139%, showing that current customers are spending 39% more this year than last.
Potential investors will want to keep an eye on the company's bottom line, as JFrog might soon make the "jump" to profitability.
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5. A prescription for your wallet -- GoodRx
GoodRx boasts the No. 1 most downloaded medical app, which the company says will "reduce the cost of virtually every generic and brand prescription by more than 70% off the list price." In fact, the prices are generally even lower than those offered by the typical insurance company copay.
Business is booming. Revenue grew at a compound annual growth rate (CAGR) of 57% since 2016. Sales increased to $388 million, up 56% year over year in 2019, while net income of $66 million grew 51%. The strong growth continued into the first half of 2020, with revenue of $257 million up 48%, while net income of $55 million jumped 75%.
GoodRx has 4.9 million monthly active customers, up 32% year over year, and 80% of its business comes from repeat users. The company's customer satisfaction is through the roof, with a score of 99%.
Of all the companies listed here, GoodRx might offer the best margin of safety for investors, as it's already profitable and is growing revenue at a respectable clip.
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A word regarding risk
There's a certain appeal to getting in on the ground floor of an early stage company and riding it to untold riches, but it doesn't always turn out that way. Investing in an IPO (or even soon after) can be fraught with peril. Even the most seasoned investor will want to take a wary eye to investing in a company on the day of its public debut, fully understanding that the risks are higher than buying shares in a company that has endured the harsh light of the investing community for numerous quarters or even years.
Not every IPO will turn out to be a good investment, so it's worth doing a little homework beforehand. However, forewarned is forearmed, and for an investor who's ready to take the plunge, one of these young upstarts might just find a place in your portfolio.
