So far this year, 43 companies have made their publicly traded debuts. As a whole, IPOs have experienced a solid year thus far, raising nearly $7 billion YTD and averaging returns of 22%. Last week alone, seven companies issued IPOs, including four companies trading at valuations of over $1 billion. Among them were popular online retailer Esty, which specializes in selling handmade goods, and high-frequency trading firm Virtu Financial (VIRT). Furthermore, two weeks prior, popular domain host GoDaddy (GDDY) also issued public shares, which valued the company at $4 billion. Although all three stocks skyrocketed during their debuts, it’s important to examine which companies are poised for long-term success.
GoDaddy (GDDY): Best known for its racy commercials featuring scantily clad Bar Refaeli and Danica Patrick, GoDaddy is the world’s largest non-governmental domain registrar. One of every five domains is listed through GoDaddy, which amounts to nearly 13 million annual customers. The stock increased 30% following GoDaddy’s IPO and settled at $25.16 as of last Friday (above the offering price of $20). However, it appears GoDaddy’s valuation, like most IPOs, is entirely unjustified. First and foremost, GoDaddy is not profitable. The company reported a 2014 annual loss of $143 million on $1.4 billion in revenue, and a loss of $200 million on $1.1 billion in revenue for 2013. Moreover, because of a 2011 structured $2.25 billion private equity buyout, a large amount of GoDaddy’s IPO capital will be used to repay its outstanding debt. Currently, GoDaddy’s debt burden stands at over $1 billion. If these shortcomings aren’t enough to deter you, GoDaddy also does not intend to pay shareholder dividends. Instead, GoDaddy’s management claims its IPO is part of an attempt to restructure its public image (away from sex and back to tech). Tragically, to reinforce this “update,” the company has ended its commercial deals with Bar Refaeli and Danica Patrick. Whether GoDaddy’s “new” image will turn out any better is yet to be seen. As such, due to its numerous negative financial and social qualities, investors should avoid GoDaddy. Traders should not consider investing in the domain registrar until GoDaddy improves its debt situation and moves closer to generating profits.
Etsy (ETSY): Etsy is a small-scale combination of Ebay and Amazon (AMZN), specializing in handmade products. The company’s stock skyrocketed following its IPO, gaining 88% at a valuation of over $1 billion. Etsy’s biggest selling point is its communal attraction, which fosters business relationships between small merchants, who sell high quality goods, and its buyers, who want an alternative to “Made in China.” In total Etsy has 54 million members, with about 20 million buyers and 1.4 million active sellers. Etsy generates its revenue from a $.20 per item listing fee and 3.5% sales commission, in addition to providing advertising space, card services, and shipping labels. Etsy has shown strong revenue growth in recent years, with an astounding revenue increase of 161% between 2012 and 2014. Moreover, 78% of its customers are repeat buyers (which echoes Etsy’s communal markets). Nevertheless, behind Etsy’s surface is an array of glaring problems. Like GoDaddy, Etsy is not profitable. Operating expenses continue to grow at a rate similar to revenue growth. Furthermore, because Etsy functions as a niche online market, growth prospects are drastically limited. Therefore, Etsy’s revenue growth comes at a severe cost, as reflected by growing OPEX and declining margins. For investors who hope Etsy will be a solid long-term growth story, prepare to enter a world of hurt; transitioning to a more efficient business model may actually result in Etsy’s downfall; Etsy will be unable to maintain its “feel-good” community if it succumbs to investor demands for growth. Thus, investors should avoid Etsy until management demonstrates it can competently oversee a profitable business strategy that lowers operating costs and retains loyal customers.
Virtu Financial (VIRT): Any financial firm that claims to have only experienced one day of trading losses over the past six years is sure to draw attention. Not so surprisingly, shares of Virtu Financial ended the week up 19% following its low-profile IPO. Virtu Financial is a high-frequency trading firm that functions as a market maker. By creating and enacting trading algorithms, Virtu enables institutional investors to buy and sell shares in massive volumes, thereby providing stock market liquidity, otherwise known as “share availability,” and ensuring limited market volatility. Virtu profits from the “bid” and “ask” spread prices, estimating that it profits from 49% of trades (which aligns with the law of large numbers); Virtu has thus far generated substantial revenue growth of nearly 9%. In the near future, Virtu also plans to issue a dividend equal to 70% or more of its net income. Virtu faced criticism in 2014 over its high-frequency trading tactics in Michael Lewis’ Flash Boys, which actually halted its planned IPO until 2015. However, general Wall Street sentiment has improved and Virtu is now considered a prestigious high-frequency trading firm. Of the three companies that issued IPOs, Virtu Financial is the most attractive investment opportunity. Not only is the company profitable, but it also has proven revenue growth, plans to issue a dividend, and rational expansionary ambitions.