Traditionally, considering an early purchase of an initial public offering (IPO) is an inherently high risk/high reward proposition. While it is wise to wait and see a few quarters' worth of earnings reports and data from a newly public company, the allure of an immediate run-up in price attracts many investors to recent IPOs.
Here's a look at two 2021 IPOs that drew a lot of early attention that now look more promising than ever despite their volatile first years.
Founded with the goal of rethinking the traditional consumer credit scoring system, Upstart (UPST -0.85%) brings machine learning (ML) and artificial intelligence (AI) to the creditworthiness scene. Connecting its banking partners and financial institutions to consumers through its lending platform, Upstart offers a fully digital process that is customizable to its customers' needs and risk profiles.
Considering that 70% of Upstart's loans are approved instantly with no need for further documentation, the efficiency its platform offers to lenders could prove to be undeniable in time. Furthermore, since the company uses its own proprietary AI and ML to assess risk versus traditional FICO credit scores, it opens up credit access to a broader pool of consumers, which has attracted 42 banks and credit unions as partners as of the fourth quarter in 2021.
These partners, while representing just a small share of the enormous U.S. banking system, drove year-over-year revenue growth of 264% in 2021. Better yet for investors, this exceptional sales growth led to newfound profitability in 2021, with Upstart recording a profit margin of 16% during the year.
However, despite this rare pairing of high growth and profitability, Upstart's stock price has run the gamut of extremes in the company's first year as a publicly traded company.
Thanks to concerns about the company's high-flying valuations (60 times sales at its peak) and rising default rates from the loans on its platform, Upstart shares have dropped almost 70% in just the past six months. Speaking to the rising default rate, Chief Financial Officer Sanjay Datta had this to say during the fourth-quarter earnings call:
Viewed in this context, rising absolute default rates that are correctly predicted and priced are not a bug, but in fact a feature of our platform and a trend we expect to see continue as we successfully progress against our core corporate mission of expanding access to credit.
It will be vital to track default rates, but it is also essential to remember that 94% of Upstart's revenue comes from fees and services with no credit exposure.
Trading at 64 times free cash flow, Upstart is still expensive by traditional valuations -- but could be a bargain for risk-tolerant investors looking years down the road thanks to its unmatched combination of triple-digit revenue growth and high profitability.
Operating in the world's third-largest e-commerce market, South Korea, online retailer Coupang (CPNG 0.85%) has quickly grown to 18 million quarterly active customers. These users account for nearly half of the 37 million total South Korean online shoppers -- no small feat, considering Coupang was founded just in 2010.
Better yet, of these active customers, 9 million are already signed up for Coupang's WOW membership program, which costs roughly $4 per month. These memberships amount to about $450 million in additional cash flow for Coupang and demonstrate a clear value proposition for its customers.
Taking a page out of Amazon's playbook with its Prime membership, Coupang's WOW offers free shipping (Rocket, Rocket Fresh grocery, same-day, next-dawn, and imports); free 30-day returns; exclusive travel and product discounts; and unlimited video streaming.
As promising as this membership base looks, it comes at the cost of steep capital expenditures. After more than doubling its total infrastructure square footage from 2019 to 2021, the company's cash from operations has become consistently negative. This highlights its intentions to trade short-term profitability in favor of long-term cash generation.
Thanks to these margin concerns, Coupang's stock has plummeted more than 60% in its first year as a public company.
Coupang now trades at only 11 times its gross profits. That compared to Sea Limited at 18 times, MercadoLibre at 20 times, and Amazon at 25 times gross profits, Coupang's valuation is the cheapest of its peers.
While Coupang may not have as long of a growth runway as these peers (without expanding outside South Korea), the nation's unique population density advantage should help drive longer-term efficiencies -- creating greater cash generation potential for opportunistic investors.