It's no secret that investing in newly public companies can be a highly speculative venture. However, not all IPO stocks are created equal, and some might just be worth putting on your watchlist. In this segment of Backstage Pass, recorded on Nov. 12, Fool.com contributors Toby Bordelon, Jon Quast, and Rachel Warren each name an IPO stock that long-term investors might want to put on their radar for 2022.
Toby Bordelon: Lots of IPOs, right? We talked about Rivian, but there's a lot of IPOs, some of them quite popular and quite hot like Rivian. Some of them I've noticed under the radar and people, you have no idea what the company is, like I've never even heard of them. You've got some preliminary name. I'm glad they're coming public and there's a lot of variety here, so tell me about one company, one recent IPO that you may have changed your mind on following the IPO. Is this interesting right, either you weren't interested in it before, you had no idea they were actually a company, and then there's the IPO that you thought was interesting.
Or you were really excited beforehand, like you really wanted to see this company go public and you take a look at the prospectus or you look the reaction in the IPO and you think, I am not interested anymore, some shift there. Jon, what about you? What do you got for us?
Jon Quast: I don't know if either of you can relate to this, but we follow so many companies, we follow so many stocks and there's so much work to be done that when all these IPOs come out. You physically can't look into them all. You can't research them all. What you do is you wind up taking these mental shortcuts to just throw a bunch out right away because you're not going to look at them all anyway. That's what I do. I look at numbers really quick, throw out things I'm not interested in, to my detriment.
Sometimes I throw out good companies or I prematurely dismiss a company when I haven't really taken time to understand the business model. One example of this would be 23andMe (ME +0.00%), when it first came public, if you look at the economics on their testing kits, it's not a very attractive business in my opinion. It's going to be hard to maintain, you spend a lot in sales and marketing to get it and there's no margins on the thing. You can't make money selling genetic testing kits like 23andMe does.
I don't think that there's any shareholder value creation through that kind of a business. However, if you look at what they can do with that genetic data that they collect, all of a sudden, it's a very different story and so they've partnered with, I believe it's GlaxoSmithKline to develop different pharmaceutical drugs based on the genetic data that they have. That to me is something that's really powerful.
If you don't understand that part about 23andMe's business and where they could take this, I think that you look at their actual testing kits and you say this isn't attractive, like I did. But then you start thinking about what are the potential upsides? I'm a big believer in big data. I think that 23andMe has perhaps the biggest genetic data set that there is out there, so 23andMe is something that as I've looked at, it definitely changed my mind to the better.
Another example would be Coinbase. I know that Coinbase, the cryptocurrency trading platform, you look at how they make revenue, the majority of their revenue. It's by trading, it's by you and me, buying and selling different cryptocurrencies on their platform and they're taking a cut.
That's not sustainable if cryptocurrency gains adoption, less volatility, all of a sudden, they're not making as much money, so that business isn't sustainable, but you look at some of their optionality where they have Coinbase Cloud, where other cryptocurrency companies can build on their platform. They have things such as custodial services.
Big businesses are buying cryptocurrencies now, and they need a secure way to store that. That's different than how you and me might store it. Coinbase can offer custodial services. There's a lot of different levers that they can pull that are a lot more interesting to the long-term viability of Coinbase's business.
Rachel Warren: Yeah, that's an interesting one. I haven't followed that company super closely, but I do completely get what you're saying. With so many IPOs, sometimes, it's hard to keep up.
I personally, the one I'm going to talk about is Airbnb (ABNB +0.48%). Obviously this was a very closely watched IPO late last year. I personally didn't follow it too closely. I think there was mixed sentiment among investors, partly because the company was going public during this very rough time in the pandemic.
Even though it had this huge slice it controlled of the overall vacation rental market, didn't seem like a really ideal point in time. Over recent months, Airbnb has had great recovery from the doldrums of the pandemic.
I have really started to follow it more closely. I think it also just goes to show this is a company that is only up about, not even 50% price-wise from its IPO price. Although when I was checking today, it looks like shares shot up today by about 8% for no apparent reason that I can see.
They had a great third-quarter earnings report a couple of days ago though. I think the market is starting to catch up with the long-term positive sentiment that there is for the stock. I think, especially in a time where people are starting to travel again, borders are reopening. We recently reopened our borders here in the U.S. to international travelers in a big way.
Then I think also at the same time as you have more and more people that are seeking remote jobs, location flexibility, Airbnb is a great option for that because you can essentially live like a local wherever you choose in the world and have a comfortable place to work and live from. Airbnb, I think, is a really interesting company to watch.
Its most recent quarter, the company said that both its revenue and its net income was its highest ever. It's revenue was up nearly 70% year-over-year, and its bottom line grew nearly 280% year-over-year. Just huge, huge profitability there, which is incredibly exciting.
This early on in the recovery for travel, I think and as well, nights and experiences booked were up 30% year-over-year, and its gross booking value was up 50% year-over-year. Definitely seeing a nice jump in Airbnb stock on the heels of that report.
But I think just as an overall thesis for this company, you look at the fact that people are maybe changing the way they travel. Now that the pandemic's happened, I think people like the ability to have the feeling as being at home wherever they are traveling and perhaps be a little bit more comfortable versus staying in a hotel.
I think that as Airbnb continues to grow its market share in the vacation rental market, you're going to see more and more of this with travel restrictions lessening as well. I really like this company as a long term investment. I think it's going to take some time for the shares to catch up with its long-term growth potential, but I also think that's a good opportunity to potentially buy in now and wait for that to go up. That's my pick.
Bordelon: Thank you guys. Both good options there. I'm a big fan of Airbnb myself too, Rachel. A little bit of share that I keep thinking, maybe I can up that a little bit and look into a little bit more. Rivian's an obvious one for me, I was actually quite interested in this company.
The product looks really intriguing, but at this valuation, I just can't bring myself to be too interested. Maybe we'll check back in six months and see where we are. The other one I wanted to throw out there as LegalZoom (LZ 0.51%).
I don't know if you guys have heard of the company or are aware of them. They try to make various simple legal documents, easy to do and cheap to do, things like basic wills and trust or LLC formation documents, that sort of stuff.
Robert Shapiro of O.J. Simpson trial fame was their pitch man for a while, was involved in the early days of legal and they just recently went public. I looked at them initially when they went public, and I think I don't know about their valuation, I'm a little bit concerned about that.
Valuation's come down a little bit and now I find myself a little more attracted to the company, I want to look at a little bit more. Interesting idea and treating company been around for a while but new to the public markets. That's one I'm looking at.
