Interesting Investments: IPOs

Avery-Taylor Phillips  |

We’ve looked at some pretty weird and, dare I say it, interesting investments over the course of this column. From private servers to rare video games to super-luxury RVs and, of all things, parking spaces and the very weather itself; we’ve ran the gamut. But, now that the dust is settled on Elon Musk, it’s time to do a traditional investment: initial public offerings (IPOs).

An IPO is, in short, when you take a private company public. The company’s shares are then traded on the stock market, and there’s usually a buy-in period before the actual stocks go live. You’ve probably heard of major companies like Facebook doing an IPO. We’ll get to that in a moment, along with another fairly recent tech-related IPO that caught the public eye. First, we’re going to look at one example of a company, how it almost did an IPO, sold its shares privately, and is now once again looking at an IPO at a much higher valuation.

LegalZoom

LegalZoom, a website that offers legal help and services, launched in 1999 with only $1 million in angel investments. It grew by leaps and bounds, gathering clients and eventually purchasing a law firm in the U.K. In 2012, LegalZoom filed with the New York Stock Exchange for an IPO, looking to raise $120 million in its IPO after a $66 million venture financing Series B round in July 2011.

Instead of taking the company public, LegalZoom found a better deal and sold $200 million of its equity to Permira, a European private equity firm. Although Charles Suh, the CEO of LegalZoom, declined to say what percentage of the company the $200 million stake represents, it would make Permira the largest stakeholder.

This proved to be a wise move as LegalZoom rapidly grew. Six years later, the company raised $500 million at a $2 billion valuation, up from the $440 million valuation from 2012. While a 2012 IPO would have raised a good amount of funds, waiting allowed them to expand and become a big name in the industry.

Though Suh did not say how much Permira’s stake was worth, simple math shows it was about half of the company’s stake. Permira, which ended up investing in 2014, sold some of its stake earlier this year as part of the $500 million raise. With the $2 billion valuation, LegalZoom, which is eying a second chance at an IPO, will be able to sell the stocks for higher, raising more money than they could in 2012.

By waiting, getting private equity, and becoming a more recognizable name, LegalZoom greatly increased its valuation over 6 years. If it had gone to IPO in 2012, it would have been a fantastic investment. If it does go to an IPO at its 2018 valuation, it’s still probably a good investment. LegalZoom is now well-known and has steady revenue — exactly what you want to look for in a company as it goes public.

Facebook

While LegalZoom pulled out of an IPO in order to get more private equity and build its valuation, Facebook  (FB) followed through in 2012. Founder Mark Zuckerburg had resisted going public, but passed the 500 shareholder mark, causing him to rethink the idea, as SEC rules forced disclosure for the next year. He had limited choices.

There was much speculation about what the valuation would be. The previous year, the website was valued at $50 billion. Underwriters ended up near the top of what Facebook was hoping for, at $38 per share, for a valuation of $104 billion. The company planned to sell a 15 percent stake.

Despite upward fluctuation to $45, the shares closed out the day at $38.23. Still, it sold more than 421 million shares, raising just over $16 billion in the IPO.

If you had invested $1,000 in the IPO, you would probably be very happy on the 6th anniversary, May 18. The shares would be worth nearly $4,800, almost five times the purchase price. The shares were just over $193 then.

Facebook had a high-profile IPO, but this did not translate to immediate growth. However, as one of the most popular websites, that also manages to have positive revenue, it was a good pick for long-term growth.

Tesla

The IPO world is not without its drama, however. Tesla  (TSLA) debuted on the stock market in 2010 with IPO shares priced at $17. Putting in $1,000 would get you 58 shares, and, as of June 29, each of those shares were worth just under $343. That means your 58 shares would be worth a bit under $19,900, a 1,889 percent increase. Not bad at all. Given founder Elon Musk’s track record, Tesla would have been a good bet then, in any case.

The drama, however, comes when Musk tweeted earlier this year that he had secured funding and would be taking the company private again at $420 per share — a number that would prove somewhat ironic a few weeks later. Share prices were a proverbial roller coaster, rising 11 percent, only to fall 4 percent. The tweet prompted an SEC investigation.

Another incident added to stock drama, however, when Musk appeared on Joe Rogan’s podcast and smoked marijuana on the live show. While legal in California, where the show was recorded, shareholders were not impressed. Two senior executives quit the company, and stocks fell 6 percent.

Compounding the problems, the SEC investigation ended with Musk settling with the SEC, stepping down as chairman of the company’s board and paying a fine. Six days after a court approved the proposed settlement, as of this writing, the stock price is sitting around $257. If you still had those 58 shares, they would be worth $14,906.

Tesla, when it became a publicly traded company, was already disrupting the industry by doing what other automakers didn’t. Even if it eventually failed, its stocks were poised to keep going up. So far, they have, and have even weathered the storms of Elon Musk’s scandals.

Snap and Blue Apron

Not all IPOs thunder out of the gate and make money, however, even if the names are titans of industry that have massively popular followings.

Snap-owned Snapchat, an app popular with young adults, had a disastrous first quarter as a public company. After an IPO in 2017, Snap  (SNAP) posted a loss of $2.2 billion. IPO shares started at $17 in March. By August, shares were under $12. As of this writing in late October 2018, more than a year later, Snap’s shares are selling for $6.83. They simply had no real way to monetize the app, and the company has suffered plummeting stock prices as a result.

Blue Apron  (APRN), a big name in the meal kit delivery business, started its IPO with nearly $10 per share in June 2017. The problem was competition and lack of differentiation. With other kits like HelloFresh and Plated, Blue Apron simply couldn’t pick up any traction in the stock market. As of this writing, Blue Apron is trading for a mere $1.20 per share.

Some 72 percent of millennials want to be an entrepreneur, with 60 percent of college students wanting to start a business and 67 percent of graduates saying they lack the know-how. If, however, they can come up with a good idea — a social media network that will catch fire and become one of the biggest websites of a generation, or a company that creates some of the best-known electric cars — they might have what it takes to start a company and take it public. Betting on a crazy idea with an interesting take on an industry could just see dividends as an IPO investment soars. If, however, there is competition and no obvious way for the app to make money, stay away.


Image source

DISCLOSURE: N/A


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TSLA Tesla Motors Inc. 344.44 -9.03 -2.55 6,839,126 Trade
FB Facebook Inc. 131.06 -0.50 -0.38 33,804,612 Trade
SNAP Snap Inc. Class A 6.06 0.01 0.08 14,449,612 Trade
APRN Blue Apron Holdings Inc 1.09 -0.06 -4.82 1,398,053 Trade

Comments

Emerging Growth

Alliance Growers Corp

Alliance Growers Corp is a Canada based diversified cannabis company. The company is primarily focused on the development of Cannabis Botany Centres in Canada.