The lure of investing in newly public companies is the prospect of getting in on the ground floor of the next Microsoft, which has returned over 238,000% to investors since its initial public offering in 1986. In contrast, the S&P 500 has generated only 1,500% returns since then.
Yet for every big success like that there are dozens of failures, and investors would probably be better off passing most IPOs by. The latest iteration of taking companies public -- special purpose acquisition companies, or SPACs -- holds the potential for even more flameouts, as SPACs are stocks in search of an idea and under usually a two-year deadline to bring a company to market.
Yet for every rule there are exceptions, and the three companies below that recently went public -- either through a SPAC or a traditional IPO -- are ones you just might want to consider.
Cybersecurity specialist CrowdStrike Holdings (CRWD 9.26%) has been red-hot since its 2019 IPO, with revenue doubling every year since. True, some of the growth is coming by acquisitions, but it's mostly organic. With the stock up more than 240% since then (versus a 35% gain for the broad-market index), investors might think they've missed the boat, but there's good reason to believe CrowdStrike has an even brighter future.
The massive SolarWinds hack last year that compromised the systems of thousands of customers, including Fortune 500 corporations and the U.S. government, is a reminder that CrowdStrike's technology could be vital. Its use of sophisticated detection techniques like behavioral analysis and artificial intelligence gives it industry-leading capabilities to detect and thwart cybersecurity risks, which also allows customers to customize the level and type of protection they seek.
That's leading to "consistently high" customer retention rates, according to the company, but perhaps more important, its dollar-based net retention rate exceeds 120%, meaning customers that stay with CrowdStrike spend 20% more on average each year.
CrowdStrike's cloud-based Falcon platform continues to define what the company calls the Security Cloud, and investors should feel assured that the cybersecurity leader will continue to outperform.
One of the biggest daily fantasy sports and sports betting operations in the country, DraftKings (DKNG 1.84%) went public through a SPAC last April and, like CrowdStrike, has handily outperformed the market since, with 270% returns.
Although sports betting was legalized in 2018 when the Supreme Court struck down the federal ban on placing wagers on sporting events, it's still a largely untapped market. To date, 20 states have authorized sports betting and made it operational. It's legal in another four, but they're still working out the details of having their regulations go live. Of those two dozen states, DraftKings is active in 13 and either the runner up to or ahead of rival FanDuel, leaving more than half the country for DraftKings to expand into.
DraftKings estimates the total addressable sportsbook market could be as high as $40 billion, which, if it merely kept its 25% or so share of the market, would allow it to control some $10 billion in sports betting.
There is a long ramp of growth ahead still to climb, and DraftKings is a good bet to be there helping to blaze the trail.
Virgin Galactic Holdings (SPCE 4.41%) is another publicly traded stock that chose the SPAC route, going public in October 2019 by merging with a Social Capital Hedosophia vehicle.
It was a notable debut because Social Capital's founder, Chamath Palihapitiya, has been one of the biggest cheerleaders for SPACs, and investors have watched his investment vehicles closely since Virgin's debut. The promise of space tourism has captured the imagination of many beyond the investment world, and Virgin Galactic is the one targeting the goal of making it practical.
That's why its stock tanked recently. Anticipation for the test flight of Virgin's VSS Unity spaceplane was running high, and promises of a February launch put the goal of starting commercial flights in sight. But when it canceled the flight until May without offering much of an explanation, investors dumped its shares.
That seems premature. While Virgin is generating little to no revenue and running up losses, it is plowing ahead with disrupting not only space flight, but commercial air travel as well. It also has an aircraft that can fly at Mach 3 at 60,000 feet in the design phase. That could reduce travel time between New York and London to just two and a half hours, about a third of what it takes today.
It took Elon Musk's SpaceX years to get up and running, but it has become a successful venture. There's every reason to believe Sir Richard Branson could have similar success in commercializing space flight and hypersonic air travel.