A Look at the 2021 IPO Market

Why is dating app Bumble (BMBL -0.59%) opening a cafe and wine bar? Are Microsoft (MSFT -1.27%) and Apple (AAPL -1.22%) the new "safe" stocks for conservative investors? Why are there so many IPOs already in 2021? In this episode of MarketFoolery, Motley Fool analyst Maria Gallagher answers those questions and analyzes Clear Secure (YOU -2.90%), the frequent flier ID company, on its first day as a public company.

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This video was recorded on June 30, 2021.

Chris Hill: It's Wednesday, June 30th. Welcome to MarketFoolery. I'm Chris Hill, with me today, from the financial capital of the United States of America, it's Maria Gallagher. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Hill: Apologies in advance to the dozens of listeners for the degrading quality of my voice. If there's no episode of MarketFoolery tomorrow, that's why, because this cold is just getting worse. Today, we're going to talk about allocation strategy. We're definitely going to talk about Bumble's new business initiative, but let's start with IPOs because we have already had more IPOs in the first half of this year than we did in all of 2020. There are 18 IPOs this week. That is the most IPOs in a single week since 2004. Before we get into one of the companies going public today, when you step back and look at the state of IPOs, what stands out to you?

Gallagher: What's really interesting is a couple of years ago, people said this was the hottest IPO market and then 2020 cooled things off, but then we're seeing this pent-up demand in this 2021 IPO market. In general, the global equity index has risen to new highs in 2021 and the IPO activity has reached its highest level in over 20 years. I think it's a lot of positive market conditions driven by things like government stimulus programs, post-pandemic optimism, improved macroeconomic indicators, improving unemployment pent-up demand. But the top industries recently for IPOs were the financial sector and then technology then healthcare, over 350 SPACs went public. Just in the first quarter of 2021 alone, there were 332 SPACs going public in the first half of 2021, which is more than all of the SPACs in 2020. It's been the best-performing first quarter by deal number and proceeds; like I said, in the past 20 years. I think that we're just seeing so much pent-up demand and so many of these companies getting a very positive reception when they come into the market. So they're pushing themselves out at a very rapid pace.

Hill: I'd just say it's good to see this just because over the past decade in particular, as a general broad trend, we've seen fewer and fewer public companies. As someone who's interested in investing in companies, and also as someone who makes his living talking about [laughs] public companies, I like the way that this is going.

Gallagher: Yeah. It's interesting. You've also seen in the past 10, 15 years, companies coming public at much later stages. So, unicorns aren't very rare anymore, the way that unicorns used to be rare. We're also seeing a range in how big those IPOs are, which I think is good for public market investors. So you're saying we're still at the beginning innings of a company as opposed to Airbnb coming public as already a household name. Everyone already knows Airbnb. I think seeing that range or something that's exciting for me as an investor to try and get in on those companies more at the ground floor.

Hill: Let's get to one other company that's going public today, and that's Clear Secure, the frequent flyer identification company. I was actually getting their reports over the weekend. I wasn't flying anywhere. I was just meeting someone for lunch because that's our class area. I like to have lunches in airports. Sure enough, there was a big setup for Clear. I think most people who have flown are at least familiar with Clear, it's trading under the ticker symbol Y-O-U. Clear went public at $31. It opened a little bit higher than $38 a share, and at the moment is somewhere around $42 a share. Is this a business that you've taken a look at? If so, how interesting is Clear?

Gallagher: It's pretty fascinating. Like you said, it's a biometrics security company, so it helps you zip through the airport security lines. It uses eyes, face, and fingerprints to automate your identity verification. It launched in 2010. It's popular among frequent flyers where you can purchase a subscription for about $180 a year. But what you see is that during COVID, they actually launched the health pass, which is a major new feature of this app that securely stores your COVID information. That's gained traction not only in airports, but in stadiums for sports events and stadiums for live entertainment events. One-third of the NBA teams are using it to enforce COVID protocol for fans. I think that this is a pivot that you want to see in leadership of when there is something that will hurt the majority of their business like global shutdown of travel when most of their revenues were from airports, that they shifted to something also profitable and also building their brand awareness and can be utilized by many people. I think that that makes me more interested in the leadership that they were able to pivot so well. I just think that everyone hates going to an airport. I don't know anyone who [laughs] enjoys going.

Hill: Unless you're going for lunch. If you don't have to go through the security lines and you're just meeting someone for lunch, it's nice.

Gallagher: Yeah. I don't know anyone other than you that does that. But $180 a year for someone who is a frequent flyer, I think that's a no-brainer, it's a very reasonable price point. I do think that it will be interesting if it gets rapid adoption. It's one of those things where you want it to still be premium because if a lot of people use it and then I go in the Clear lines, just as long as the regular line, that's a problem for me as the traveler. So, it'll be interesting to see as they scale how they maintain the exclusivity. That is the reason people will want to use it and what that will look like for them. I think that they might go into some barriers, but they're still so small, they're still growing. I don't think that'll be a problem yet, but in the future, I think that that could be a logistical problem that they'll have to work out.

Hill: Our email address is [email protected]. We got a note from Ian Meek in Scotland. He writes, "I started buying stocks in February 2020 and I've done rather nicely, thanks to the guidance from the Motley Fool podcasts and your Stock Advisor service. I am aware that this past year has not been a normal one for investors and that 100% returns are not standard." Let me just add parenthetically, that's great. I love that Ian instantly has the perspective like, "Yeah, I know. This is not what I should be expecting every year for the rest of my life." He goes on to say, "My portfolio of 35 stocks consists mainly of Fool favorite tech and FinTech stocks. In 10 years, I'll be in my mid-50s with retirement suddenly not so far off. I don't really see myself reallocating to conventional value stocks like Procter & Gamble, Unilever, Kimberly Clark, etc. Is it sensible to instead switch to tech behemoths like Microsoft and Apple? They can hardly be described as riskier growth stocks anymore, can they? Love all the Fool podcasts and services. Keep up the good work." Thank you for that, Ian. 

It's a great question and it also raises something that I've been thinking about recently, which is that, what we consider to be safe, steady, "blue chip" investments, really has evolved. Because for a long time, it was companies like Procter & Gamble and IBM and Kimberly Clark and Unilever, and it was like, "Well, you're not going to make a ton of money year-over-year on these stocks, but they're going to be steady dividend payers and you'll increase in value a little bit," that sort of thing. I like the way he's thinking on this because, I don't know about you, I'm surprised at how well Microsoft and Apple have done. Not Apple so much, but definitely Microsoft. I'm surprised at how much that stock has increased in 2021.

Gallagher: Yeah, I think it's a great question. Also, in the beginning he talked too a little bit about, what even is a tech stock? Because any company that's doing well is a company that utilizes technology. Some examples that I would think of as one of the best technology places is Domino's Pizza. They've done amazing things with their technology and so understanding, well, the technology at Domino's Pizza is very different from CrowdStrike, a cybersecurity player, or Intuit, who owns TurboTax, which is a much steadier grower. I do think understanding your risk tolerance, I think this is a very self-aware Investor, which I think is one of the best things you can be as an investor; is understanding your own risk tolerance, understanding your time horizon, so I think he's already starting off super strong with that awareness. Thinking through, "I want to get into maybe a little bit less riskier plays, understanding what that overall portfolio looks like." I think that going into some of those tech names that are maybe steadier growers like in Microsoft, like in Apple, like Intuit, and understanding, well, this has a really solid track record. I can probably understand what's going to happen in the next five to 10 years for these companies, as opposed to a newer or more faster-growing company. Well, they've been around for a couple of years, I don't know what the next 10 years looks like for them, but it could be really exciting, understanding where all of those types of companies fit into your portfolio. But I definitely think that for me, when I think about being more conservative, I don't automatically go to Procter & Gamble, I would go to something bigger like Microsoft or saying, I am going to be diversified with all of these different avenues.

Hill: Yet, I think it's important to realize that the narrative for businesses like Procter & Gamble is probably not going to change. By that, I mean, there will always be people, some of whom are well meaning, who will say to you, "Well, now that you're in your mid-50s, you need to start rotating it." Procter & Gamble household products, everybody needs those. People buy that stuff whether there's an economic boom or there's a recession. That rationale for these types of business, I think, it's always going to be the same.

Gallagher: I mean, they have their reputation for a reason. General Mills has the reputation of being a steady dividend payer because it's been a steady dividend payer. Not to knock those companies, I think that there are parts of your portfolio that can benefit from having those types of companies in it. But understanding where you want, maybe those medium growers, where you want those fast growers, and I think maybe just balancing your portfolio to understand where all of these fit into your broader investing journey, is really important. But yeah, I think people will always tell you, once you're getting a little bit older, make sure you have bonds, make sure you're invested in those blue-chip companies, and so understanding what that means and understanding where that fits into your portfolio, I think is the best thing that you can do.

Hill: On July 24th, Bumble, the dating app where women make the first move, Bumble is going to open a café in New York City. It is called Bumble Brew, it is a café and wine bar. Julia Smith, the head of partnerships at Bumble, says the café is going to be a safe space for healthy and equitable relationships and connections. I can't promise I'm not going to make a couple of jokes here, but let's start with this. That's great that that's the way they are approaching this. But I don't know about you, Maria, but when I think about whether or not I'm going to go into a café, my first question is usually, how good is the food? I get that it's a safe space and all that, tell me about what's on the menu and how good is the wine and the coffee and that kind of thing.

Gallagher: I was confused, I thought that this was a café where you go to meet people to potentially date, so you just sit there and wait for someone to come up to you. But this is apparently a café where you pre-plan to go on a date, I think.

Hill: I'm on a trip in New York City and I walk by Bumble Brew, and I'm just on business travel by myself, and then I'm like, I could use some coffee. I can't go in by myself? I don't know.

Gallagher: It's very unclear. I do think that as a business, I think saying, everyone who's going on a date goes to this place, if you're going on a first date and they take you to the laziest place to go on a first date, I just wouldn't be impressed by that. As opposed to, there are lots of cool places to go in New York, I think it makes more sense if this is a place for speed dating or something where it's you go there to meet a person as opposed to you have already met a person and you're going there to hang out.

Hill: All joking aside, what do we think of this strategy of a dating app, opening a bricks-and-mortar café? Because one of the first things I thought of was when Urban Outfitters, years ago, bought a pizza place, I think somewhere in the Philadelphia area. This is a relatively new public company. I think just in the last 12 months, Bumble has gone public. I think if you're someone who bought shares of Bumble, you did your research. Are you happy today? Because I don't think you are. I think part of your rationale if you bought shares at Bumble was, "This is an asset-light business. This is a tech business," and now, they're putting in some amount of money, maybe it's fractionally a tiny amount of money, but they're allocating capital toward running a restaurant, which is, historically, a tough business to do well in.

Gallagher: I also think in terms of user experience. If you're talking about a company like Peloton, I think that it makes sense for Peloton to have a storefront in New York, to have a place where you can go and try out their bikes and take a class, because Peloton has control over what that experience would be like for the user in terms of how they hire their instructors and what the atmosphere is. Bumble has very little control on who a person goes on a date with and what that experience is, so I just think that that's inherently a riskier business model to say, you might have the worst date of your life at this place, or it might be the best date of your life. There's not much that Bumble can do to control what your experience is at that café, which I think is a very risky move for them.

Hill: I think the great thing if only for you and me, is that a year from now, we're going to know how this plays out. Because a year from now, I think Bumble is either going to come out and say, "this was a hit, and now we're opening one in LA and Chicago," and they're just going to be popping up all over the country, or they're going to very quietly shut this thing down.

Gallagher: Yeah, I was thinking about it. I waitressed all throughout college, and one of the best aspects of being a waitress was witnessing first dates because it's very funny and very enduring. Honestly, I think it would be really fun to be a barista at this Bumble café, and so I just think that if you're interested in working somewhere, that would be, I imagine, a very fun place to work.

Hill: Maria Gallagher, great talking to you. Thanks for being here.

Gallagher: Thanks so much for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening. The market is closed on Monday, just keep that in mind. If we're not here tomorrow, the market is closed on Monday, so maybe we'll see you on Tuesday. Thanks for listening.