A Tale of 2 IPOs

In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:

• The market's reaction to Instacart's IPO and whether the company can return to its lofty private valuations.
• An under-the-radar IPO -- Klaviyo -- and why it's worth studying to understand the data relationships between businesses and their customers. 

Motley Fool host Deidre Woollard gets the inside scoop on peak performance and corporate training from consultant and author Greg Harden. 

You can grab your copy of 5 Stocks Under $49 for free and Fool.com/Report.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 20, 2023

Dylan Lewis: Today we're looking at two IPOs. One you know and one you don't. Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst, Tim Beyers. Tim, what's the caffeination level over in Colorado right now?

Tim Beyers: Fully caffeinated. Ready to go. Thank you for asking.

Dylan Lewis: Love it. Today we've got two IPOs; one that has captured a lot of headlines and a lot of attention. Probably a very familiar name to a lot of people, and another one that borrows its name from mountaineers. We're going to have a fun language lesson later in the episode. Tim, let's start with the household name first. Instacart shares hit the market this week. Some clear interest in this one we saw a day one pop shares are back down around where the IPO priced in the low 30s now. What did you see in the market reaction and what did you see in the business looking at this one?

Tim Beyers: Well, the business really cleaned up in order to get to the IPO, they really made a concerted effort, and we've talked about this before that Instacart made a really concerted effort to get profitable ahead of its IPO debut and not surprisingly, the market liked that. We haven't seen very many IPOs where the company comes out and it's readily profitable and they're talking about profitability long-term, which is great. I do think there is something to the Instacart business and to the reaction that we're seeing there is a premium that companies are getting when they're coming public with some profitability behind themselves. In the case of Instacart, I think they do white label for some very big names and I think there are some big retailers that do not want to do things like grocery delivery and are very happy to outsource that to Instacart. We know there's a bit of a competitive advantage there. Having said that, that does not mean that this is a market that is Instacart's to lose. I think it's still a bare knuckles market and so seeing it come back down is the recognition that there was a bit of a premium priced into this and I don't think the market is ready to sustainably pay premiums, really for any business, but particularly tech businesses. We haven't seen a lot of premium pricing. At least on a sustained premium that keeps rising for tech businesses, that's more the 2020 market and that is not 2023 market and honestly, Dylan, I think that's somewhat healthy. I'm glad to see that.

Dylan Lewis: To your point, Tim, you look at where the price is settled now and they're probably roughly at $12 billion valuation based on what we've seen. That's down pretty dramatically from where they were just a couple of years ago in the private markets, $39 billion company. This has got to be one of those confusing ones for a lot of people because this is certainly a snap test company where if it disappeared, a lot of people would notice right away with the economics of this business very tough too.

Tim Beyers: Well, yeah. You get into retail anything and now you're getting into delivery and the logistics of delivery and there are so many moving parts here. One of the main questions I had for Instacart coming into the IPO, Dylan, is these operating expenses and the moderation of these operating expenses looks great right now. How about when this company scales, because they are going to continue to go after growth will we continue to see? Will they gain economies of scale as they scale up? Can they keep this up or was this dressed up for the IPO? That's a question I don't have the answer to, which is why I'm not an owner right now.

Dylan Lewis: Do you think that's a fair question people should be asking of tech companies in general right now? Is the discipline that we're seeing on the cost side sustainable discipline or is this something that goes out the window when money becomes more available?

Tim Beyers: I think you should ask it every single time. I think one of the tests you can run is if you are looking at the documents and you see multiple periods of cost discipline not gross margin but operating margins are improving and they've been improving over time that's a good sign, that is a company that does appear to be gaining economies of scale as it gets bigger and grows faster. Those are good signs. If it happens to be a pretty small window and it came just before the IPO, then I think you should be appropriately skeptical.

Dylan Lewis: I think regardless of the outlook for Instacart and also, ARM Holdings and other very buzzy IPO recently regardless of what you think of those two businesses, I feel like Nasdaq shareholders probably pretty happy to see more names coming public Tim, and a little bit more of that IPO activity for the exchange.

Tim Beyers: No doubt. I think that's right. There is a website that I tend to look at just so I can see the IPO pipeline it's called Retail Roadshow. What that means, retail roadshow is it means this is a company that's going out, it has its IPO prospectus. It's preparing to go public and so it's going out and talking to investors. It's on a roadshow. Retail road show would say, hey, here is a company that's going out and they're talking to investors now, and so you could go to that site and you could see it. There's only one company in the backlog right now. At the height of the IPO market, there's usually five or six that are just lined up and going out to see different institutional investors, Dylan. It's not back to where it was but there were months where that list was just barren. You could go to retail roadshows like nope, we don't have anything today. Now we've got something and that's different and better. I do think investors are happy to see the IPO market warming up a little bit, but I also think it's very good to see investors being discerning. That is smart. We don't want to be betting real money on companies that are mistreating public investors by going to the IPO market too quickly just to get some easy money, put it on their balance sheet, and hope and pray someday they will have a better, more profitable business. We don't want that. We want good businesses coming public.

Dylan Lewis: With the IPO landscape over I'd say the last 6-12 months, Tim, we have seen these big names come public and there's been a lot of enthusiasm for them. Cava is one that was somewhat recent. We see it again here with Instacart. I think the hope, if you're interested in this space and you want to see new names come public, is that some lesser-known names also get some of that enthusiasm and we see some momentum there as well and we have, I think, a litmus test of that this week. We have Klaviyo coming public. This is a company that provides intelligent marketing automation powered by customer data. Tim, help me unpack that. What exactly does this company do?

Tim Beyers: First, say that three times fast. Come on. [laughs] You can totally do it.

Dylan Lewis: Intelligent marking automation powered by customer data times three. [laughs].

Tim Beyers: It's a mouthful and doesn't really mean anything. Essentially what Klaviyo does, this is a very competitive space that has become more important recently and they're called Customer Data Platforms or first-party data platforms and all that means is that it's software that is capturing data about the customers that you do business with and their tendencies and their purchase history and all sorts of things to make it easier to automate and fine-tune your marketing to those existing customers because they matter. You want to drive as much of your business as possible through things like repeat purchasing. Where this all got really it came out of, I would say, Dylan, the movement to get away from what's called third-party data, which is I buy a dataset and it's anonymized. It comes from data that's collected through things like apps and social media. Apple decided at one point it's like, you know what, we don't like it if there are apps on our platform and they are collecting data from customers who are using things like iPhones, and then reselling that data to other people for third party data so that they can market. We don't like that, we're going to put a stop to that. This is by the way, how Facebook just got absolutely rocked by Apple. Do you remember all of that?

Dylan Lewis: That was a huge sell-off.

Tim Beyers: That was huge. We've gotten away from this idea that third party data is how we market. Now first-party data, in other words, getting smarter about the transactions that live in the stores that we have. Who are our customers and how do we get to know them better? How do we automate the way we market to those customers? That's what a customer data platform is and Klaviyo is one of them. They made their bones around doing business with Shopify. Back at that time, they were more of like, an email automation platform or marketing automation platform. They were founded in 2012 and we're very popular within Shopify. They've been profiled by Shopify like, hey here is this business that's built on Shopify. They have done very well to scale to where they are. But this is a very competitive market, Dylan. If it sounds like customer data platforms are something that a lot of companies do or could do. You are correct and so yes, go ahead.

Dylan Lewis: I want to hop in there. Is the right way to think about this business that increasingly companies are trying to own the relationship, specifically the data relationship that they have with their customers and these businesses help do it.

Tim Beyers: Yes. That is a way to think about it. This used to some degree, the focus was really on communications with customers. That was marketing automation, like how often do I automate? What's the schedule at which I send emails? How often or when do I send a text? When do I make a phone call and things of that nature? We've graduated from that to, I want to know everything I can about the customers that I have and their preferences and tendencies so I can tailor to them much more specifically. I want to know everything I can know. You collect all the data, you operationalize it. Then you build workflow on top of that. How often does this customer want to be emailed? Or do they not like email and they prefer text, things of that nature. Klaviyo does this and they say here's how they talk about it and I think this is fascinating. They say they enable business users of any skill level to harness their data in order to send the right message at the right time across email, SMS and push notifications more accurately measure and predict performance. It's that marketing automation with the data. You smush those two things together. The way they talk about this, they have their own, this is adorable, but not really. They have their own little metric that they call wait for it. They call it Klav.

Dylan Lewis: Wait, what does that Tim?

Tim Beyers: I think it stands for Klaviyo attributed value. It's like, gross purchasing volume, we see GPV all of the time. I think that's what they mean by it. They say there 130,000 plus customers they've realized 37 billion of calve. They essentially say by putting these two things together, the automation and the data, they help their customers generate value by how they engage with their customers.

Dylan Lewis: Tim, trying to understand this business and hearing you talk through it a little bit, It sounds like a company that we follow a little bit here at the full and also use and our customers at the Full braze. Is that the same space that this business operates in?

Tim Beyers: There are a lot of businesses that are loosely related and they may attack it slightly differently, but Brase is certainly one of them. That's a rule-breaker pick. Twilio is another. Twilio started as a communications company. They were using the Cloud to enable SMS, to enable email and all of these things. Then they've grown into that, and now they've really gotten big on building out a customer data platform on top of all of those communications. Those two are Klaviyo and Twilio who had been partners. They're wrestling with each other a bit. Brase too. They all come at this slightly differently with different approaches in their tech which if you're an investor I could see how that would be immensely frustrating. It becomes a shrug emoji, like which one do I pick or do I buy all of them? The answer is to me, I think if you are going to get deep, you may find some that have some different financial advantages. But it can be perfectly great, Dylan to either have a basket or ignore the space entirely until you see somebody really establish clear financial advantages.

Dylan Lewis: Tim, I like to tell you, set the table there talking about just the history of data and the relationship that businesses have with it. Because I think regardless of whether you have a horse in this race in your portfolio, probably a space that people need to understand as they think about on line marketing and just the way that customers and businesses are interacting with each other.

Tim Beyers: Absolutely. Look, if you are interested in Klaviyo, I personally am not of the opinion that this is a buy at the moment. But if you want to see whether or not this platform is sticky and one of the things I like about Brase is they seem to be very sticky with the customers who have chosen them. Here are the Motley Fool. There's a lot of people internally here that love it and what we've been able to do with it, like emails that you get from us now, those are powered by Brase. You may see like, for example, this is something really stupid. But it's something that's actually been very meaningful that we've been able to do through Brase. If you get an email from us, and you see at the bottom it has a smiley face and a frowny face. You click one of those to say, I like this or I don't like it. That is data that is signal that populates inside Brase and gives us insights that allow us to make decisions about how to either send you more or less email of a certain type and Brase has that functionality cooked into it. In the case of Klaviyo, there is a metric that they have, that I think would tell you a lot about whether or not It's sticky, like braises. There are presently 1,458 Klaviyo customers that generate at least 50,000 in annualized recurring revenue, so 1,458 it's about 1.1% of the total universe of Klaviyo customers. If that ratio starts to go up and starts to go meaningfully up, like it's from 1.1% and then you see it in a couple of quarters, it's going up to 1.5% and the next year it's up to 2% I think that would be a very good indicator for this business Dylan.

Dylan Lewis: That sounds like strength to me. That's generally how we like to look at these as businesses is, can they increase spend, increase the relationship they have with their customers and grow as their customers grow?

Tim Beyers: That's what that would tell you, is that you have a cohort of customers that are making bigger and bigger commitments to Klaviyo, which as a as company, the economics of software as a services, you need customers who have decided your platform is so valuable that I will make big long term contractual commitments to you. That tends to show up in the reported number for the large customers. In the case of Klaviyo, those are the customers that are spending at least 50,000 annually on their platform.

Dylan Lewis: I promised a language lesson here Tim. I'm going to give it. We've been saying Klaviyo. You can forgive anyone that pronounces it Klaviyo. The name of the company is inspired by Klaviha, the Spanish word from mountaineering pins, which support climbers as they ascend the mountain. The idea is this business helps other businesses on their way to the summit. It's some nice storytelling and I think a fun way to tie into where they fit into the customer. One of the things I want to leave with here is this walk talks and quacks like as company. We have a dollar-based net revenue retention number. We have high gross margins. This is also a company that came public at roughly an $11 billion valuation, first day of trading, 600 million trailing revenue. Tim, how does it feel to be looking at a stock trading at 20 times sales.

Tim Beyers: Still too high. It's still too high.

Dylan Lewis: I'm bringing it around to our expectations conversation earlier.

Tim Beyers: It would be a lot better if that were a lot lower. In the case of, let's say a company like Brase, which again I like quite a bit, it's on the rule breaker scorecard trades for half of that. Trades for half of that, and doesn't burn as much cash and is a very sticky platform. Both of them are unprofitable at this point, and they are similar. There's always room in this category, particularly at this stage of the market where customer data platforms are still relatively new. You're going to get a lot of different players and the consolidation is probably not going to happen for several years here yet. Dylan, at least the history of tech would suggest that, and that is absolutely fine. You could easily own the basket here, but I think it's just as great to say like, you know what, I'm not ready for this yet. Let these guys prove themselves. It's a bare knuckles fight. Let them punch each other in the face, not to be too brutal about it, but let them fight it out a little bit and we'll see who is showing up with better financial results.

Dylan Lewis: Tim, you're my go to for the history of tech and also where it's going. Thanks so much for joining me and talking to me through this one.

Tim Beyers: Thanks, Dylan. 

Dylan Lewis: Tim is my man for all things tech and he's one of our premium analysts here at the Motley Fool. Our premium team thinks there are a lot of great companies out there that are back at levels not seen in years. That's why our analysts have rounded up five companies that have dipped below $49 a share. We're giving away that list for free. You can grab a copy of the report. Five stocks under $49 for free at Fool.com/report. That's right, five stock picks totally free from our premium team. We'll also put a link in the show notes put Fool.com/report is where you can get it. Next up, some mindset advice from one of Tom Brady's coaches. Greg Harden is a Peak Performance Consultant and the author of Stay Sane in an Insane World. How to control the controllables and thrive. Motley Fool Money is Deidre Woollard caught up with Harden to discuss why Fortune 100 businesses call in a coach and what businesses can learn from elite teams.

Deidre Woollard: We all know that athletes have coaches, but business people can and should have coaches. A lot of them don't. What is the value of having a coach in a business career?

Greg Harden: Well, let's think about it like this. If we're pushing an agenda that's like total person peak performance. The total person is who we're talking about. We're not just talking about a money making machine, we're talking about a human being. We're not just talking about a MVP of a Super Bowl, we're talking about a human being. When we are committed to just trying to become a better person, I guarantee you you'll be a better leader.

Deidre Woollard: Well, I love in the book you touched on one of my favorite principles, which is luck is meaningless unless you're prepared for it. Luck is awesome, but if you can't capitalize it, it doesn't matter. How do you prepare people to capitalize on that moment when something does fall on your lap?

Greg Harden: Well, what you're opening the door to talk about is attribution theory. [laughs] What do you attribute your success to?

Deidre Woollard: Yes.

Greg Harden: Or hard work and teaching people to understand. It's important to learn that the rewards you have gotten is because you worked so hard for it. You planned and prepared for it. Deidre, you said what I say. I believe in bad luck. Only when opportunity knocks and you're prepared, does it work so teaching people that opportunity is going to knock and if you're prepared, you can go somewhere. If you're not prepared, if you don't understand it, if you don't train for it, it will pass you by. Opportunity has knocked for a lot of people and they were not prepared.

Deidre Woollard: Do you feel you have to train for bad luck in the same way?

Greg Harden: I believe that order and chaos is readable and there are going to be times of conflict, there will be times of trials and tribulations, and it's predictable. Therefore, more manageable than people think. I can anticipate that something is going to go wrong and I have to be able to buckle up and be confident and clear. The data says that I have recovered and we've done fine.

Deidre Woollard: I want to talk a little bit about Tom Brady. As you mentioned, you wrote the forward to the book. You coached him early on. I grew up in Massachusetts, so thank you for creating a winner. It was great to see our Patriots win. We know what he does on the field. What do you think the smartest thing he does off the field?

Greg Harden: He trains not just his body, but he trains his mind. He's constantly trying to figure out how to improve the way that he thinks and the way that he processes. He studies the game. He isn't just like, I'm really good, he's studying the game. This boy knows defense is better than the defensive coordinator, but he's the Quarterback, shouldn't he just know. He does not rely on, I can throw the ball, I have great receivers. He knows what you're going to do before you do it.

Deidre Woollard: Interesting. What do you think of some of his business acumen?

Greg Harden: Well, it seems they're like everyone else that said successes and failures. But he's had more successes than failures. This boy is good. Everything he touches turns to gold. If it doesn't, it wasn't supposed to happen, but he moves on and he recovers quickly. If it's not working, he moves on.

Deidre Woollard: That's a really important point. You have coached Fortune 100 companies' businesses. You're obviously called in. The company needs something from you. What do you find that they're looking for, usually?

Greg Harden: Oftentimes and they call you for many different things. But just to keep it specific for our discussion, sometimes they're simply trying to get managers to be better. What do I do when I go in? I'm going to make your managers better coaches. But Deidre, are you ready for this? What do I do if you call me about your coaches? I'm going to tell your coaches to be better managers, [laughs] to understand not just the X's and O's, but what it means to run a corporation. It's a business. When I'm going into a Fortune 100, whatever company, small or large, I'm going to actually talk about leading with humility. I'm going to talk about empowerment and trusting the people that are on your team. If you can't trust them, why are they on your team? We're going to talk about, stop thinking that because you have a work group, you have a team. A group is not a team. This is our marketing team. This is your marketing group. Now let's turn them into a team by taking them away from this setting and teaching them about each other, to love, to trust, to be able to build each other up, and to bond at a level that hasn't been done before. Just because you've got a group that's working together, doesn't mean that they have bonded.

Deidre Woollard: What does that look like? Let's say you're at a company, you know that they're a group, not a team. Does this take the form of corporate retreats, or is it things you do in an office? What things do you do to make them a team when they're not cohesive like that?

Greg Harden: Well, we're going to cover the whole range. Oftentimes it's going to be a retreat. Most importantly, we've got to get them out of their normal setting so that we can open up their minds and end up having fun and teaching them how to actually test each other and see what works for Pete and what works for Gladys. There are some things that they don't know about each other. Imagine that you're sitting in a room of these corporate giants and whiz kids, and you ask them in 25 words or less, share with everyone in this room something that made your heart sing. Something that is totally unrelated to this business. Something that brought a joy into your heart. Something that you feel good about. Something you're proud of that has happened in the last 12 months that nobody knows about you. Deidre, that's a game changer. It starts off pretty vanilla. I swear at some point somebody is going to say my father was dying and he was able to survive because of the love that we gave him. Somebody is going to say, my child was sick. Somebody is going to talk about the greatest adventure of their life and the challenges that took place. All of a sudden I'm knowing I see Deidre more than just my competitor or my colleague. I'm seeing her as a whole person. When I see my colleagues as real people, all of a sudden there's an energy that changes in the group dynamic and all of a sudden we're considering ourselves together and I see you as a whole person.

Deidre Woollard: That vulnerability is really key for trust.

Greg Harden: It is amazing. We're not just going to do fall backwards and we'll catch you. We're going to challenge them to think about things they haven't talked about before in a group like this.

Dylan Lewis: As always, people on the program may own stocks mentioned and the Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.