Buying newly public companies can be risky, but the potential reward of buying into a fantastic business in its early stages of growth is understandably a huge draw for investors. In this segment of Backstage Pass, recorded on Oct. 27, Fool contributors Rachel Warren, Brian Withers, and Trevor Jennewine discuss three recent entrants to the market that investors should pay attention to in the months and years ahead.
Rachel Warren: We are going to move into our fourth question of the hour. The popular trading app Robinhood just reported its third-quarter earnings on October 26th and investors were less than pleased. Its revenue missed analysts' expectations.
The company reported revenue of $365 million versus the $432 million that analysts were projecting, and the company cited a decline in crypto trading as a key factor behind the slowdown of its top and bottom-line growth. Earlier today when I checked, shares of Robinhood were down about 10%.
Now, it's not uncommon for shares of a newly public company to pop and then dip in the months after. My question is: is there a company that recently IPO'd that you think is worth taking a second look at today?
Brian Withers: Yeah. I'll jump in. I've been watching AppHarvest (NASDAQ:APPH) throughout this year. It came public, I want to say the end of last year, early this year, and I first pitched it on the small-cap show back in February. And at that point, it had zero revenue and they had a market cap of about $3 billion, and then in June, I pitched it again. We changed the small-cap show to the 10X show.
The market cap was $1.7 billion. Well, it just started getting some revenue at that point. It looked a little more attractive to me. But they had a tough first harvest and the stock has come way down and I think the market cap now is $514 million. Sorry for folks who've bought that stock and ridden this one way down.
I'm still intrigued by the company and if they are able to do what they proposed to do, is not just create a number of farms that capture the rainwater, and are very efficient, and are grown locally, shipped locally, all of that good stuff.
They want to create a farming ecosystem, a technology farming ecosystem that other companies can use. This could be a really big, big idea. Right now, I don't know if it's at maximum or if it's at its low point, it could certainly go down from here if they have continued challenges. But AppHarvest, APPH is the ticker, is still an interesting one for me.
Trevor Jennewine: I really like that. I'm intrigued. I'm going to have to look into that. I'm going to go with company Riskified (NYSE:RSKD), ticker is RSKD. Riskified is a fintech company that went public back in July. Just to give a little bit of background, it works in the e-commerce industry.
E-commerce will continue to gain traction in the years ahead. It's been a major growth driver in past years and it's been a great thing for businesses and consumers alike. At the same time, as online sales have become more common, so has fraud. Riskified's platform addresses that.
The problem that it specifically solves is that a lot of companies still lean on in-house solutions to identify fraudulent transactions, and those solutions tend to be expensive, hard to maintain, and they tend to be inaccurate a surprising amount of the time.
To give you some context there, Juniper Research believes that e-commerce fraud will total $25 billion by 2024, which means that a lot of the illegitimate transactions are being approved and when that happens, if you go online or you see a charge show up on your credit card that you didn't make, you call your bank and say, "Hey, I didn't buy this," the bank reverses the charge and that money gets pulled back out of the merchant's account.
The person who gets hit the hardest is the merchant. On top of that, there's also the other side of that equation where valid transactions are actually being declined. False declines will actually total $443 billion this year. That means those systems are incorrectly declining transactions that were valid.
Riskified uses artificial intelligence to automate the approval and denial process, its platform is 99.8% accurate. Basically, it collects hundreds of data points per transaction, and then it correlates those data points with the over one billion transactions that have already been processed on its platform, and that allows it to quantify or predict the risk of fraud.
One of the things I really like about the company is that they guarantee a minimum acceptance rate for their clients, and that acceptance rate varies depending on the industry in which their clients operate. It's going to be a lower minimum acceptance for higher-risk industries and vice versa. They also assume liability for all fraudulent transactions. So if they let a fraudulent transaction pass them, they're going to take responsibility for it.
That really creates a lot of value. To put that in context, looking at the top 10 merchants on its platform, they've seen revenue rise by 8% per year and fraud-related operating expenses fall by 39% per year. But some companies have seen revenue go up higher than 20% and some have seen fraud-related operating expenses fall by more than 60%.
It's creating a lot of value. It's still a very small company. Growth in the most recent quarter, gross merchandise value on its platform, which is $22 billion. So to put that in context, there is trillions of dollars being spent on e-commerce every year. But the GMV, gross merchandise, was $22 billion, that was up 57% over the previous year. Revenue was $56 million, and it was up 47%.
One of the thing I really like is that through the first six months of 2021, they had a positive $5.3 million in cash from operations. So not profitable on a GAAP basis, but positive cash from operations. This company reminds me of Upstart and I think it has a lot of potential here.
Rachel Warren: I like both of those. I had not heard of either of those companies and now I feel like I really want to read up about both of them and it's interesting with Riskified to seeing how much value AI can have in that particular area.
Well, one company I thought of that recently went public and that is ThredUp (NASDAQ:TDUP). It's a unique play in the e-commerce space, which is a space that I write about pretty frequently.
ThredUp is basically an online consignment store. You can buy and sell used clothes on the platform. The stock went public earlier this year in March and shares with the company are only trading up about 7% since that time. It really hasn't been a high performer by any means.
But I do think it is an interesting company to watch if you're looking at e-commerce and you want to look at maybe an early growth player and also a company that carves this unique area out for itself within the broader e-commerce space.
ThredUp actually conducted a study not long ago and found that the secondhand clothing market is projected to double in the next five years, reaching total sales of $77 billion.
There is a really vast market opportunity there for ThredUp and the company grew its revenue 27% year-over-year in the most recent quarter, and gross profits were up 34% year-over-year. Again, not a company that's delivered very strong or robust gains, but it's definitely one I think that it's worth watching.