It seemed like companies couldn't wait to go public in 2020 and 2021 when unbridled market optimism saw initial public offerings (IPOs) fetch huge valuations from investors. But times have changed, and it's been quiet for most of the past two years.
However, marketing automation platform Klaviyo (KVYO 2.56%) had its IPO last month and represents an exciting potential investment idea, even if it's among a small selection of IPO stocks to choose from.
I've taken a deep dive into this lesser-known software stock to paint the picture for you. Here is why Klaviyo can be a long-term winner in a sparse class of IPOs.
How Klaviyo adds value to businesses
Klaviyo collects first-party user data to create personalized customer engagements. First-party data is information that comes directly from customer interactions in an organization. Examples could include customer reviews, coupons, loyalty points, in-store visits, and the like.
Klaviyo collects and analyzes this data to create user profiles and performs automated actions catered to each user.
For example, imagine you're browsing an online store for XYZ Jewelry, a Klaviyo customer. Its marketing automation platform might track your activity, like what products you look at, for how long, how many times you view a product, and even how much time elapses between visits.
Klaviyo can then automate a personalized engagement -- maybe an email, a discount offer, or a pop-up on your device -- to encourage you to buy the product you've been focused on.
Taking advantage of customer data is becoming increasingly important for businesses as traditional advertising becomes more complicated. Advertising on social media was a staple for years, but now, smartphone users can block apps from tracking their activity. Data isn't necessary just for training AI models; it's crucial to understanding customers at a level more personal and nuanced than ever before.
Efficient and personalized marketing could be essential to competing in business over the coming years. Klaviyo wants to be the solution to this challenge.
Klaviyo has the qualities of a high-quality business
It's one thing for a company to talk about adding value, but it must also appear in its financials, and that's where Klaviyo begins standing out. The company was founded in 2012 and has built its business to nearly $600 million in annual sales. And it is already free-cash-flow positive, an important sign that its future should include profits.
It has about 130,000 customers of varying sizes spread internationally: Roughly 30% of sales through the first six months of 2023 came from outside the Americas. With millions of companies worldwide, there is plenty of room for customer growth.
The net revenue retention rate of 119% indicates that it can also expand spending by existing customers, meaning it can grow revenue without bringing on new accounts.
KVYO revenue (TTM) data by YCharts. TTM = trailing 12 months.
Klaviyo built its business in commerce but believes it can expand across other industries. Management estimates that the combination of potential new markets, new accounts, and new sectors totals a $68 billion global market opportunity. That seems fair, given advertising is a natural part of sales in all industries, but how much the company grabs on to remains to be seen. That question will take years to answer.
The potential pitfalls of buying Klaviyo stock today
IPO stocks are usually riskier than others because so little is known about them. Even though Klaviyo has gone public with an impressive resume, investors don't know how it will perform as a public company. Can management make good decisions for the long-term benefit of shareholders? Nobody knows yet.
The stock isn't cheap; the company's market cap is $7.9 billion, and a price-to-sales ratio (P/S) of 14 puts it in the same neighborhood as some enterprise software stocks that have been public for longer and proved themselves.
KVYO PS ratio data by YCharts.
That doesn't leave much margin of safety for investors at today's share price. The stock has been public for only a month, so investors shouldn't feel rushed into buying. Consider adding shares slowly and expect volatility until the company gets a few earnings reports under its belt.
With that said, Klaviyo is a promising business with compelling long-term potential. It's definitely a stock to keep on your watch list.
