This year's stock market has gotten off to a red-hot start. The S&P 500 has notched new highs, and several high-profile companies are taking advantage of the bull market conditions.
Popular trading platform Webull just announced that it is pursuing an initial public offering (IPO). Let's dig into the specifics of the deal and assess whether this fintech represents a compelling opportunity.
1. Going public through a non-traditional route
One thing that sticks out about Webull's proposed offering is its non-traditional route to the public exchanges.
The company is going public through a special purpose acquisition company (SPAC) with SK Growth Opportunities Corporation. The chart below shows a brief pop in shares of SK Growth Opportunities Corporation after the news of its planned merger with Webull.
While SPACs have been around for a long time, you may recall that they became quite popular a few years ago. A prominent Silicon Valley venture capitalist (VC) named Chamath Palihapitiya played an influential role in the SPAC boom. He brought high-profile tech companies such as Opendoor Technologies, Clover Health, and Virgin Galactic all public via the SPAC acquisitions.
Unsurprisingly, many other high-profile financiers followed Palihapitiya in the SPAC movement. However, a closer analysis of how these investments turned out may give you some pause about buying into the Webull offering.
Image source: Getty Images.
2. Recent SPAC investments have a poor record
According to data tracked by SPAC Insider, there more than 800 companies went public via SPACs between 2020 and 2021. But in 2022, the SPAC train began to slow in a big way. Why? Well, the returns of SPAC stocks significantly underperformed the broader markets.
Companies that had an equity value between $2 billion and $5 billion have returned negative 86%. Moreover, companies valued at over $5 billion returned negative 74%.
While not all SPACs have fared so poorly, it's hard to ignore the data points above. Let's take a closer look at Webull specifically to assess its risk-reward profile.
3. The competitive landscape is tough
Since Webull is still a privately held company, there is not much known about its financial performance or operating metrics. However, recent filings with the Securities and Exchange Commission (SEC) can provide some color about the company relative to its fintech peers.
According to public filings, Webull boasts an impressive roster of private equity investors, including Lightspeed Venture Partners, General Atlantic, and Coatue Management. This isn't much of a surprise given how popular trading apps have become.
In recent years, platforms such as Robinhood (HOOD 3.60%) and Coinbase (COIN +1.20%) have risen in popularity, specifically among retail investors and crypto enthusiasts. Neobanks like SoFi (SOFI +0.25%) have also gained momentum due to digital-first platforms where members can trade stocks, or obtain a loan or a mortgage.
Where I see some concerns around Webull is when you get a closer look at the company's user base relative to its peers. Per the investor presentation, Webull has 20 million registered users. However, only 4.3 million of these are actually funded accounts. In contrast, Robinhood ended 2023 with 23.4 million funded customers. SoFi closed out last year with 7.5 million members -- each of which uses 1.5 products on the platform, on average.
These metrics are important because they highlight which platforms are gaining the most customers. Furthermore, given the prolific product suites of both Robinhood and SoFi in particular, each company has demonstrated its ability to cross-sell to existing users. This helps immensely with customer retention and long-term sustained profits.
On top of that, Webull boasts $8.2 billion in total assets on its trading platform. While this grew by 38% last year, it still pales in comparison to Robinhood's $103 billion in assets under custody -- which is growing at 65% per year. SoFi, which is primarily a lending business, has funded over $73 billion in loans.
It's clear that Webull is much smaller than its primary competition. And yet, another concern I have about the IPO is Webull's proposed valuation. Following the acquisition, Webull will have a projected $7.3 billion enterprise value.
HOOD Enterprise Value data by YCharts
Although Robinhood and SoFi are each larger entities, it's hard to justify Webull's proposed valuation on the surface. The company has a much smaller user base that is also less engaged than other trading and banking platforms. To me, I think Webull is trying to take advantage of bullish market conditions while investors remain enthusiastic.
But make no mistake about it -- the Webull IPO will likely come with its share of risk. A prudent strategy could be to monitor Webull's progress relative to its peers after it goes public and all of its financial information and key performance indicators can be found. But for now, I'd avoid scooping up shares and look for growth in more established players.
