Favorite Long And Short Ideas From Recent IPO Season

There has been a barrage of IPOs over the last few months. Having added some of those names to our database of proprietary earnings model, we thought of sharing our initial thoughts on our favorite names for potential Long and Short.

Vroom (Nasdaq: VRM), the online car-buying platform that is being compared to Carvana (Nasdaq: CVNA) has been received well, but the hype around the name is a bit over-exaggerated right now. We have written a detailed note on the company. We believe Vroom has executed well, driving growth in the e-commerce business, but at the cost of profitability, which is reflected in declining gross profit per unit, especially compared to Carvana.

Our quick back of an envelope calculation suggested that the stock can go up to $50, if the company ends up enjoying the similar trading multiple like that of Carvana. Which is paying too much for a company that just went public and has a lot to catch up to do.

SelectQuote (SLQT) is an insurance comparison site and dynamics of the industry are benefiting from the broader insurance companies doing well with the profitability of insurance companies improving on the back of fewer claims amid the lockdown. Increased profitability for insurance companies usually leads to more spending on online customer acquisition and better sales for companies like SelectQuote.

Another major insurance comparison site EverQuote (Nasdaq: EVER) had a nice run over last year, but as the chart below shows, SelectQuote looks like a better alternative now. The company is growing faster and spending less on driving that growth, while both company continue to enjoy favorable macro tailwinds.

 Rev 2019Sales growthPrice/ SalesGross MarginSales & Marketing
SelectQuote $33752% 869%33%
EverQuote $24944% 594%80%

Warner Music Group (Nasdaq: WMG) timed both the excitement around music apps like Spotify (Nasdaq: SPOT) as well as the market craving for IPO well, leading to a well-received issue. The result is that a business with barely double-digit sales growth, low single-digit operating margins and large debt on the balance sheet can trade at valuations usually reserved for high-end technology companies. This excitement may soon hit against the fundamentals, when investors realize that weak advertising demand does have a negative bearing on the business.

ZoomInfo Technologies (NASDAQ: ZI) is a cloud database provider used by sales and marketing teams. Like Vroom, the company got the Street excited with its Cloud-based business model that carries high gross margins, so low costs to maintain the business, extremely high sales growth rates, and founder still active, who along with private equity investors will still control 90% of the combined voting power. 

Yes, the company is doing well, but much of the positives are already baked in the stock price that has more than doubled since the IPO and going forward there is a risk of marketing budget cuts and weak advertising business if the broader economy doesn’t pick up the pace soon, both of which will have a bearing on the business. So risk/ reward tradeoff doesn’t look too exciting for us.

Shift4 Payments (NASDAQ: FOUR), touchless processer for payments and banking services, had a relatively uneventful debut, even though the price is up 50% over the IPO price. The business does enjoy a strong tailwind with the growing acceptance of touchless payments and results are visible even in the current environment. In the first quarter, the company handled more than 66,000 merchants representing over $6 billion in end-to-end payment volumes.

The company may raise more capital in the near future, which may keep the sell-side interest in the stock high but an overhang of new stocks may keep institutional investors in wait and watch for a while.

The Azek Company (Nasdaq: AZEK) was accepted surprisingly well by the market. For a supplier of decks, railings and trimmings to excite investors in a current economic environment where high unemployment is expected to lead to poor demand for high-ticket products are remarkable.

But we think this enthusiasm among investors may be short-lived when they scrutinized the fundamentals of the business up close. The commercial segment, which is 15% of the total revenue, negligible growth business and residential segment, is doing good for now, but for how long is anybody’s guess without a v-shaped recovery.

OneWater Marine Inc. (Nasdaq: ONEW) is enjoying good momentum even though just another boat company

Although this IPO came out before the Covid-19 pandemic in February, we just caught up with the name now. The IPO wasn’t a success but the Street is finally getting warmed up to the name, thanks to lockdown inspiring people to go for outdoor leisure activities and the company benefiting from better demand.

In a recent update, the company informed that revenue for the quarter ended May increased by 30% and same-store-sales topped 25% compared to the prior year, both sales and same-store-sales exceeding expectations. Stronger sales usually lead to better revenue from high-margin finance & insurance segment, resulting in overall better profitability.

Yes, the business is hardly sexy, but the macro tailwinds are strong and the name is relatively undiscovered. The stock may continue to benefit from both for a while.

Casper: Hype is over and creating consistent and profitable track record will take time

Before IPO, there were high hopes from Casper Sleep (Nasdaq: CSPR), especially if you lived in New York and saw its ads on the subway, but the stock burnt investors who participated in the deal. One of the main differentiators for the stock was the company’s high revenue growth rate in an otherwise boring category.

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Source: Casper SEC Filings

The model of distributing mattresses through multiple channels, both e-commerce and retail stores, is hardly new. At the core, it’s a difficult category to be in due to the competition and given the market is growing at 6-7% growth rate, need to continue to gain market share to sustain high growth,

Operating margin leverage is missing from the model since the company continues to spend heavily on sales and marketing. Yes, longer-term return on marketing spends is good, the relevance of aggressive spending to gain market share at the cost of profitability may not make public shareholders happy.  Relatively, Purple Innovation Inc. (Nasdaq: PRPL) looks much better, if one is a growth loving investor etching to have exposure to mattress business.

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