We revisit all the new companies we talked about in 2021, look at the landscape of the IPO market in general, and zoom in on some of the most interesting debuts from the year.
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This video was recorded on Dec. 17, 2021.
Dylan Lewis: It's Friday, December 17th, and we're looking back at all the IPOs we've talked about during 2021. I'm your host, Dylan Lewis, and I'm joined by Fool.com's last lucky loon of lowered look back losses, Brian Feroldi. Brian, how is it going?
Brian Feroldi: Dylan, it's going great. Very happy to be here with you. This is one of my favorite half hours of the week.
Dylan Lewis: You're buttering me up, Brian. You're buttering me up. This will be the last Friday show that we do in 2021. We thought it would be fitting to revisit all of the S-1s that we've talked about. Not just S-1s, I suppose, we talked about some stocks as well. Because, one, Brian, there were a lot of them. We did a lot of shows on S-1s. Also, it was an incredibly huge year for IPOs and public debuts of companies.
Brian Feroldi: That's right. We were spoiled for choice this year, which is funny because I thought we were spoiled for choice in 2022 with the number of potential companies that we pointed out. But you have some data here that shows 2021 was one for the record books.
Dylan Lewis: Yeah. I think I'll start just by painting a picture of the year in IPOs for 2021. Ernst & Young just put out a report giving an overview of all this, and it's pretty incredible when you look at the global IPO trends. A couple of stats that paint a picture for you. Almost 2,400 deals raising over 450 billion in proceeds, both of those numbers up 60 percent year-over-year, and those are global stats. So you have to remember, we're not just talking about the US markets here. In the US, 416 IPOs, Brian, up 86 percent year-over-year and plenty of cash as well.
Brian Feroldi: Those IPOs just in the United States raised $156 billion. That was up 81 percent over the prior year. Interestingly enough, within that group, 128 of those IPOS were from the tech sector. The tech stocks in general raised $69 billion. Now, as our listeners might surmise, a lot of those stocks had big first-day pops. In fact, the average stock in the US popped 33 percent on its first day of trading. But as you may have noticed, if you look at your portfolio recently, a lot of those IPO stocks have come back down to Earth and the average performance of the IPOs through December 7th, which is when this Ernst & Young study ended, the average stock was down five percent from its offering price. Not from the IPO, directly from the offering price. So there has been a lot of pain out there for IPO investors.
Dylan Lewis: Yeah. Realistically, the average investor like you and me, not getting our hands on any shares at these companies until they are probably well above that offer price with some of the initial demand being so high. Brian, I think as we're recapping public debuts from this year, the last year-and-a-half has felt like a blur and kind of a time warp where it's been both six months and eight years depending on how you felt at various points. I have almost forgotten about the SPAC insanity that completely occupied the beginning of 2021, and the numbers there are absolutely staggering.
Brian Feroldi: Yeah. As many IPOs as there was in 2021, the SPAC market was even bigger than that in the US. So in the United States, there were 583 SPACs. They raised $152 billion. Those were record-setting numbers on all accounts.
Dylan Lewis: We didn't manage to hit 400 or so IPOs with our show, Brian, but we did over 20 public debuts over the course of 2021. I'm going to give a quick rundown on all of the names that we manage to cover, and I'm going to do my best to get through it without getting tongue-twisted. You might delight if I do, though. UserTesting, WeWork, Toast, Olo (OLO +0.00%), Freshworks, HeartFlow, Blend, Duolingo, Global-e, Berkshire Grey, Confluent, SentinelOne, UiPath, KnowBe4, Affirm, Informatica, Vicarious Surgical, Squarespace, Bird Global, Hims & Hers, and FIGS. That's a heck of a line up of companies that we were able to get through.
Brian Feroldi: Well done, Dylan. Well done. As you pointed out here, the returns have been not all that great for many of the companies that we covered.
Dylan Lewis: Yeah. I think of that list of 20-ish companies, I only see five currently in the green from where a lot of folks were able to get their hands on shares. I think given what we just hit in terms of the massive amount of SPACS, the number of companies that came public in 2021, the returns of a lot of those companies, it's been a weird year. We always have a little bit of a bend, Brian, of being growth-oriented. Most of the companies that we're looking at in this group here of these 20 or so stocks, really growth-oriented, futuristic-looking businesses, those are businesses that have gotten hit very hard over the last couple of months. You and I know that just from looking at our own portfolios. I'm sure that's the case for a lot of the folks who are listening to the show right now. The reality though is, while there is red for a lot of these companies, it doesn't mean there aren't quality businesses here.
Brian Feroldi: That's right. The numbers that we just spouted off aren't all that crazy. I mean, if you look historically at the date of the data shows that IPO stocks tend to be underperformers moving forward because there is so much excitement and things going on the day that they come public. More importantly, for me, when a company goes from private to public, that is in many ways a cultural changing event for the company. Being a private company, you're not held to 90-day earnings call estimates and not every management team can manage the public expectations the same way they can when they're a private company. For that reason, that's one reason why I tend to stay away from IPO stocks with my own portfolio with some exceptions, of course. But I like to see how a company performs on the public markets for about a year before I would really get interested in.
Dylan Lewis: Yeah. We know that there is often a lot of demand for these shares early on and very often there is not a lot of supply. With lockups and things like that, we tend to have a pretty short amount of shares or small amount of shares actually available for purchase that can create some weird things in terms of pricing dynamics. A small amount of demand can actually be outsized in the impact that it will have on the share price early on. A lot of the businesses on that list that I mentioned before, Brian, down 20, 30, even 40 percent, there are a handful that posted positive returns in their debut year. Global-e, Confluent, SentinelOne, Affirm, and Informatica. We're going to highlight from that list I think a couple of companies that we're particularly interested in. I think we can kick off talking about Global-e, of the companies that we dropped in that list, hands down the best performer. Almost a clean double for people that bought shares early at this point.
Brian Feroldi: Yeah. Global-e was a company that fascinated both of us when we were running through it. As a reminder, Global-e is an e-commerce company that's focused on direct-to-consumer cross-border payments. So if you are a merchant in one country and you want to set up shop in another country, Global-e helps you to basically localize your commerce site for that market, helps with things like payments, returns, shopping, etc. So the company was in hypergrowth mode prior to coming public and we've seen more of the same after it came public.
Dylan Lewis: Yeah. When we looked at the S-1, just to quickly recap what we said then, triple-digit year-over-year top-line growth, good cash position, no debt, net dollar retention rate over 140 percent. One of the things that we did note as a knock on this business was the margins were below where we thought they would be for a company like this, especially because it's pretty easy to compare them to other players in the e-commerce space like Shopify and see what that opportunity could be for them. That was one of the things that we had on this business.
Brian Feroldi: Certainly. It was a high-growth company, but a relatively low margin business. But we've seen improvements and continued growth and emerging as it's reported results. In the most recent quarter, the company's top line is growing at a 77 percent rate. Very impressive, given that the revenue growth rate in prior years was very fast. So that's working off of a high base. The company's gross margin has expanded a bit. It's still low in absolute terms at 38 percent, but it is heading in the right direction. The company still has a long growth trajectory in theory ahead of it. The big news that came out after we did our report on this company though was with Shopify. Prior to coming public or at the time of the IPO or right after that, Shopify took a meaningful stake in Global-e. They actually became a 6.5 percent shareholder. As part of that deal, Global-e became the exclusive provider of cross-border payment services for Shopify's customers. I think if you had to point to one thing for their huge outperformance, that would be it.
Dylan Lewis: Yeah. I think when you invoked Shopify, it tends to get people's attention and get people excited, Brian.
Brian Feroldi: It certainly does. That's one reason why the stock has taken off and the valuation has been very high. It is worth noting that that streaming higher share price did not go unnoticed. Some of the company's insiders decided to cash out of Global-e in September. They sold about 14 million shares for $64 a piece. Given where the company IPOed and where the stock headed, that isn't all that surprising to see. Still, it's worth noting.
Dylan Lewis: Yeah. What's interesting about this business is Shopify is both a partner and a stakeholder here. I remember when we first did our S-1 on this company. Something to pay attention to is they were heavily reliant on DHL. That was a big part of the actual logistics of how they get stuff from A to B. But DHL was also a stakeholder in the business. I think it was about five or six percent shareholder. This is a business that seems to have a lot of people that are in the industry supporting it, which I generally take to be a pretty good sign.
Brian Feroldi: Absolutely. I mean, who knows the market better than than those major players and who knows cross-border e-commerce better than a company like Shopify. So it certainly speaks volumes that they made Global-e their exclusive provider.
Dylan Lewis: Yeah. My personal summary on this one, Brian, is I wish I just bought the stock. So often we see these businesses very often in spaces that we've seen other companies be successful. There are times where you nitpick or you want to see a couple of quarters of results. This is one where I was like, in retrospect, there was probably enough here for me to take one small starter position just so I was paying attention to the company a little bit more. Instead of going through all those other S-1s over the course of the year, forgetting about it, having it fall on the backburner, and then look and say this company doubled while I wasn't paying attention.
Brian Feroldi: Woulda, coulda, shoulda, right, Dylan? But yeah, one of the interesting things about Global-e is it came public at roughly a four billion dollar valuation, and that's a number that you could think, well, if this company executes and is successful, is there a meaningful upside from there? I think the answer is yes. The good news is, even after that doubling that we've seen, the company is still about an eight billion dollar business. So in theory, there is plenty of upside left for investors even from today.
Dylan Lewis: Yeah. You don't have to look far in the e-commerce space to see a lot of companies doing some similar stuff and they are much bigger. Eight billion dollar company trading at 40 times sales. It's 30 percent off highs right now. A lot of high-growth businesses are on sale at the moment. I think this is one where you have to wait now that we've talked about it on the show. But I will probably start a small position in this company at some point late in the year, early next year. I think there is too much to like here, and I'm regretting not buying the shares earlier, Brian.
Brian Feroldi: There you go. I think that's a fine plan Dylan.
Dylan Lewis: [laughs] The second stock that we wanted to zoom in on from that list was KnowBe4. This might be one that folks aren't as familiar with. Brian, you want to give a quick rundown on who they are and what they do?
Brian Feroldi: Yes, this was one of my favorite companies that we profiled this year. This is one that I had not heard of beforehand and yet after I went through the S1, I was very impressed. As a reminder, the company is focused on the cybersecurity market, but really not the tech side of the cybersecurity market. What they point out is that it doesn't matter how great your tech is, if the people that are using that tech accidentally let the bad guys in through a phishing scam. KnowBe4 provides software tools that allow organizations to test how savvy their own employees are, they can do phishing scams and that thing in all in an effort to make sure that the people that are using the products know what to look for, and in case that they come up with the risks, KnowBe4 provides the education and tools to minimize that from happening.
Dylan Lewis: I think this is interesting business. I remember talking with Tim Beyers after we had done our S1 show on this company. We were trying to figure out the bucket that this company fits into. It's like, is it a software company or is it a consulting company that's wearing software clothes? It's hard to tell.
Brian Feroldi: I understand why that debate was going out on. To me, this is clearly a software company. If there is one number that shows that if the company's gross margin. Companies like Accenture have gross margins that typically hover around the 40 percent range, which is really quite good. Nobel force gross margin, 85 percent. That sounds like a software company to me.
Dylan Lewis: It does. It's hard to argue with that, but I'm sure Tim Beyers could make a strong case knowing Tim. The results for this company, that as strong as what we saw with globally, but not as disappointing as some of the other companies. I think, since it's come public, round up 4 percent dip in shares from where most people were able to get their hands on them. Let's get people up to speed on what's happened with this company since we first talked about it.
Brian Feroldi: Sure, at the time of the S1, they had about 37,000 customers. Their annualized recurring revenue was just shy of $200 million. That figure was growing about 36 percent. The company was losing money on a net income basis, but generating free cash flow, and they had been since 2018, and they had a really good balance sheet at $230 million after the IPO. What we saw in the most recent quarter was their customer grew over 44,000, up from 37,000. Revenue grew 43 percent to $64 million. Gross margin expanded to 85 percent. Annualized recurring revenue is at 44 percent, and the company generated $18 million in free cash flow, so financially, the company is thriving.
Dylan Lewis: I think in addition to all the financial updates you provided. It's worth talking a little bit about some of the other stuff that's been going on with this company. We've seen secondary offering from this business and we've seen some insider action as well, worth checking in on that in the first 12 months that a company is available.
Brian Feroldi: For sure. Just like with Global-e, some insiders were prohibited from selling the IPO, and they decided to cash out on the stock. The stock was up when they were cashing out. Insiders did sell 12 million shares in August and another nine million shares in November. Things like that are always worth putting on your radar and just being aware of. One other news item that is worth knowing about this company is they made an $80 million acquisition of a company called SecurityAdvisor. In the last couple of months management team seems really interested in this because they believe it's going to apply, allow cross-selling opportunities and allow them to launch new products that it will expand their addressable market opportunity. I like that a lot. I mean, $80 million is like a drop in the bucket when compared to the size of this business, so those acquisitions really get the thumbs up for me.
Dylan Lewis: This is a four billion dollar business at this point, 80 million as an acquisition is not betting the farm by any stretch.
Brian Feroldi: It's not at all. It's a tiny bet for the company and offers them the ability to potentially up-sell their customers overtime. From what I see, aside from the insider sign, which is, of course, noteworthy, I think that KnowBe4 is doing just fine as a business.
Dylan Lewis: I think especially for a company of this size, something that we have to remember with insider selling is, people sell shares for a variety of reasons. If you're someone who is an early employee at a company that has come public, and you're still maybe in the smaller mid-cap space, it's entirely possible that a very large percentage of your net worth is in company shares, and you might be selling just to enjoy some liquidity after having that money locked up for a really long period of time. You don't want to over-index to what you're seeing in terms of insider selling, you just want to make sure that people continue to have skin in the game and that management teams, incentives are aligned with yours.
Brian Feroldi: I think that's 100 percent correct. I think that you can learn more from insider buying than you can from insider selling. Still it is worth looking at.
Dylan Lewis: Brian, the third company that we're going to check-in on is the one-stock from the list that I did wind up putting in my portfolio. Unfortunately, not one of the companies that's in the green in 2021, and that's Olo. This is a business that's down from about like negative 27 percent, from where a lot of folks were able to get their hands on it. Folks may be the most familiar with this one because we talked about it as an S1 show, but then we also checked in on some of their early earnings updates in part because they were so strong. For folks that are unfamiliar, this is a company that makes it pretty easy for restaurants to go digital. I look at this, Brian and I say, I don't know if there was any company more squarely placed at where the world was going over the last year and a half than Olo.
Brian Feroldi: That could be why they came public. Like you, this is a company that I purchased various unit after they came public because it checks so many boxes for me, and so far it looks like we overpaid, but financially the company is doing very well. As a reminder, Olo stands for online ordering. What they do is they go to big restaurant franchise chains such as Applebee's, and they allow them to offer online ordering directly on their website. That allows them to own the customer experience rather than outsourcing the customer experience to a third-party like DoorDash. Now, they can use DoorDash or postpaid's to fulfill the delivery function, but it allows the restaurants themselves to own the customer experience, which I see as a major benefit if I was a restaurant operator.
Dylan Lewis: I think when we first did the S1, what we said was, I think we finally found the company that's actually making money in meal delivery. What was staggering about this business was on top of a lot of other really strong financials near triple-digit year-over-year growth,120 percent [inaudible 02:48:27] , 81 percent gross margins, it was a profitable company when it came public. I think in a lot of ways, an easy company to root for in meal delivery, because the dynamics seem much more aligned with the restaurants and stakeholders.
Brian Feroldi: I always look for things that make me do a double-take when I'm going through an S1. At this point, we've done so many that there's so many software and service companies like this. The thing that blew me away about Olo is at the time of its IPO, it was profitable and one of the reasons why was because they had to spend so little on sales and marketing. That makes sense given that they were focusing on a small group of customers and landing their headquarters, would force all the franchisees to go out and become customers of Olo. That was really attractive to me.
Dylan Lewis: A couple of the other things that we noted with this business. We were both clearly very impressed with it because we put the game shareholders. There were some things to keep an eye on. One of them was that, there was this frenemy relationship with the meal delivery companies, because those are generally the folks that orders get sourced to for logistics purposes and actually getting stuff to the customer. You could see how some of those meal delivery companies might not want to have someone between them and the restaurant. That was just going to be one of those dynamics that had to play out over time with this business.
Brian Feroldi: That was something worth noting. But, again, I think apart from the restaurant side of things, the restaurant wants to own the customer experience. They don't want to pay all the hefty fees that come with relying on the third-parties to do so. However, the restaurants themselves do have the option of fulfilling the delivery order themselves or outsourcing it to a third-party, and if I was that third-party it's still revenue opportunities that Olo provides to them. But to your point, that relationship was a little bit basic because they were friends and they were competitors at the same time.
Dylan Lewis: Yeah. Brian, I mentioned that this is down about 27 percent from where it debuted. I'm actually even worse off in my position. I know about you. I'm down about 38 percent on the shares that I bought of Olo. What has happened since? The reality is there's a lot of growth built into this business. It's running into some very hard comps. We saw 125 percent year-over-year growth in its first quarter as a publicly traded company, what looked like a stellar earnings report. In subsequent quarters, we've seen 48 percent growth and 36 percent growth. This, I'm sure like a lot of tech companies, is one of those businesses where we are like, "We saw a lot of growth get pulled forward. We have to figure out what these moderates do over time."
Brian Feroldi: How many companies did we talk about this year, that was the exact thing that happened to them? So much growth that should have taken place in 2021 got pulled forward to 2020. They went from triple-digit growth in 2020 to more normalized growth in 2021. I think 2022 is going to be the year that we see companies' actual growth rates. So that will be something to keep an eye on, but 36 percent growth is disappointing when compared to that 125 percent growth, still pretty good in absolute terms.
Dylan Lewis: Yeah. Earlier you mentioned this was a company that did not spend very much on marketing, and that was why they were profitable. We've seen a huge uptick in their SG&A spend and their R&D spend, and that's taken the company into the red. I will say I think I'm OK with that. With where this company is, this seems like a once in a generation land grab for customers. They want to be in as many restaurants as possible because so many restaurants are focusing on becoming digital. I'm OK with them losing money, particularly because they have $600 million in cash and no long-term debt. They're in a very good financial position.
Brian Feroldi: That will be something to watch moving forward. The other thing to point out is this company has always had competitors, but one other company that came public earlier this year is Toast. Toast looks like a very tough competitor for this company to keep an eye on. It is worth pointing out that the two companies do have integrations with each other, but it is possible that some restaurants are choosing to go with Toast and just avoid Olo altogether, that's got to be something to watch. Still, when we dug through the S1 on Olo, like you, I was convinced based on what we saw that there was a really strong compelling case for investing in a company. Only time will tell if that proves to be the right decision.
Dylan Lewis: I think that I might take a lesson from my Upwork and Fiverr debacle, where I pick the wrong horse and just say, I'm going to buy Olo and Toast and whoever wins this market, I will be a shareholder of, reality is they probably both wind up doing OK long term, but I think you can carry some of those lessons forward. I still remain bullish on Olo as a business; it's a three-billion-dollar company valued at 22 times sales. We know that the comps are going to be wonky for a business like this, and that the growth is going to be pulled around in some ways with the pandemic. I do want to see how some of the customer cohorts age for this business, but I feel really good about the cash position they have and I feel really good about the tailwinds behind it.
Brian Feroldi: Like you, I'm in no rush to sell my shares, but I do want to see how the company executes in 2022. To me, that will be the telling sign that I'm looking for.
Dylan Lewis: I think with that, that's our recap. It's incredible for us to have hit as many S1s as we have and I feel like you're right, Brian, we're truly spoiled in 2021. This is our final episode of the year for Industry Focus. Brian, I have to say to you and our listeners now, happy holidays. I hope you have a wonderful time spending time with family and taking a little break from doing everything you do for The Fool.
Brian Feroldi: I know me. I'm going to be working every single day no matter what, but thank you for the sentiment, Dylan.
Dylan Lewis: [laughs] Before we close, I want to give listeners a heads-up about some changes coming to The Motley Fool's podcast lineup in 2022. If you're a listener of one of our other programs like Motley Fool Answers or Market Foolery, you may have heard this already. But in January, Brian and I, along with a lot of our other Industry Focus colleagues, are going to be moving over to a new daily concept of Motley Fool Money. We're still going to be doing S1 breakdowns, we're still going to be covering earnings from Fool favorite stocks, but we're going to be doing it as part of a podcast super group. Think of the new show as the traveling wolfberries of podcasts.
We're excited for this new format and this new show and we feel like it's a good chance to do even more of what we do best. We hope you come with us in this next chapter, we'll be giving some sneak peaks of what's ahead in the coming weeks, but make sure you are subscribed to the Motley Fool Money feed to stay up to date. In the meantime, we're serving our listeners to make sure everything that you want to hear winds up in this new show. There's going to be a link to the survey in the description of today's episode. Please fill it out and give us a sense of what you'd like to hear us talking about. With all of that out of the way, Brian, I hope you have an awesome 2022 and I'm excited to talk to you then.
Brian Feroldi: Dylan, I so enjoy doing this show with you and I look forward to doing this on Motley Fool Money in 2022 and right back at you, my friend, have a wonderful holiday.
Dylan Lewis: You too. Listeners, I hope you guys have an awesome holiday. That is going to do it for this final Friday episode of Industry Focus. If you have any questions or you want to reach out and say, hey, shoot us an email at [email protected] or tweet us MFIndustryFocus. If you want more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned. Don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time, Fool on.
