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📮The Sunday Newsletter archive

A big week

A few weeks ago we discussed one of the most anticipated, (maybe) promising, and (definitely) controversial IPOs. It’s the trading app Robinhood ($HOOD) which is going public next week. Whether it becomes a meme stock 🤡 or not, it’s going to be an interesting name to watch.

While HOOD’s listing will attract lots of attention, it’s not the week’s only debut — there are 22 other IPOs in the pipeline, let’s unpack the most promising of them.

The second company founded by the reCAPTCHA guy

Anti-spam tool reCAPTCHA was developed in 2007 by inventor Luis von Ahn. His company quickly caught Google’s ($GOOG, $GOOGL) attention and was eventually acquired by the tech giant in 2009. His next venture was the massively successful language learning app Duolingo 🐥 ($DUOL), which is now going public.

Founded in 2011, DUOL is the most downloaded education app with over 500 million downloads. The company has a freemium business model; users can download and learn a new language for free by watching an ad at the end of each lesson or become Duolingo Plus members and enjoy an ad-free experience. DUOL also has a third revenue stream, the Duolingo English Test which is an online assessment of English proficiency. The test is accepted by reputable universities such as Yale and Stanford and was purchase by roughly 344,000 people last year, mainly international students.

As of March 31, DUOL had 40 million monthly active users and 1.8 million of them or 4.5% were paid subscribers. While only a small fraction of users pay for an ad-free experience, these users generate the bulk of the company’s revenue. In the first quarter of the year, revenue was $55.4 million, up 97% y/y and 72% of that revenue came from subscriptions. Only 17% came from advertising and 11% from the English test. We can clearly see how important it’s for DUOL to convert free users into paying subscribers, and it’s actually doing a great job. In 2020 it grew its paid subscribers to 1.6 million from 0.9 million in 2019, or 84% y/y.

DUOL is not profitable yet, as it spends a lot on marketing and research & development. Both increased faster than revenue in Q1.

Commentary: DUOL is an interesting company in the rapidly growing online learning space. The online segment of the language learning market was $12 billion in 2019 and is expected to grow to $47 billion by 2025, so the potential is quite strong. DUOL has only recently started to monetize the app seriously — it launched its subscription service only in 2019 which now generates more than 70% of revenue. The company plans to roll out new premium features that will help it will increase the conversion of free users to paying subscribers, its ultimate goal.🎯

It’s priced its IPO at a midpoint price of $90 per share, which translates into a market cap of $3.2 billion. At this price, its P/S ratio will be 20x sales, a reasonable multiple given its 130% revenue growth last year and its strong future potential. Shares start trading on Wednesday.


The company that basically created meme stocks

After delaying its IPO in late June due to an SEC review 🧐 of its crypto business, trading app Robinhood is finally going public next week. We discussed HOOD’s IPO filing in a recent Sunday Newsletter, so take a look at that issue for the detailed report.

In its updated filing, the company officially set a price range for its IPO, between $38 and $42 per share. At the midpoint price of $40, its valuation will be $33.4 billion and its P/S ratio 24.7.

While HOOD reported super strong revenue growth of 245% last year, this is mainly due to stimmy checks and the stay-at-home boredom. In the first quarter of 2021, revenue surged again 309% y/y to $522 million, but this time it was due to the meme frenzy. In other words, both were one-time events. Robinhood will probably continue to grow in the future but at much lower rates. Also, competition will be a big issue as most other brokers now offer free trading. Given these risks, the proposed valuation multiples seem to be quite expensive. Shares start trading on Wednesday.


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Your ecommerce store, deRiskified

Riskified ($RSKD) is an ecommerce risk management platform that helps online merchants minimize payments risk. It uses machine learning 🤖📚 to identify the individual behind each online interaction and approve payments faster or reject the fraudulent ones. The platform is used by big online retailers such as Wayfair ($W), and Wish ($WISH) and travel sites like Booking.com ($BKNG).

Riskified provides real value to online merchants. On average, its ten largest customers saw an 8% increase in revenue and a 39% decrease in fraud-related costs, when they started using the platform.

The company makes money by charging a fee on every transaction; smart business model as it grows when its customers grow. In 2020 revenue increased 30% to $170 million, and in Q1 growth accelerated to 54% y/y to $51 million. Riskified is slightly unprofitable, with an operating margin of -4% last year, so it’s going to become profitable soon, as it scales.

Commentary: Riskified prevents not only payments but most types of e-commerce fraud. For example, some customers may falsely claim that their orders never arrived, or that the product they purchased was damaged on delivery. In 2020 online merchants lost $17 billion 👀 to e-commerce fraud, and this is expected to rise to $25 billion by 2024, according to Juniper Research. So it’s quite a big problem, and Riskified is well-positioned to benefit as merchants need more advanced anti-fraud tools.

The company has priced its IPO between $18 and $20 per share, and at the midpoint price of $19, it’ll be valued at about $3 billion. Also, its P/S ratio will be 16, which is very reasonable, given its strong growth rates, almost positive net income and interesting future potential. RSKD starts trading on Thursday.


Ranking next week’s IPOs:

🥇RSKD
🥈DUOL
🥉HOOD

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