There’s virtually no end in sight for US IPOs. They’ve already broken their annual record, with the year not yet at its half way point. And next week will be the peak 🗻 of this frenzy; 21, yes 21 companies are scheduled to go public.
Today’s issue is a little different. It’s not only about the most promising and anticipated debuts but also about the upcoming IPO that I’d definitely avoid. Let’s see.
The company that killed Uber in China
Didi Chuxing ($DIDI) or officially Xiaoju Kuaizhi, is one of the most anticipated IPOs of the year. It’ll be the largest Chinese listing in New York since Alibaba ($BABA) raised $25 billion 💰 in 2014.
DIDI is both an Uber competitor and partner, how is this possible? In 2016 Uber ($UBER) gave up its costly battle for China’s riders and DIDI bought its operations. Uber was paid in stock and now owns 12.8% of its biggest competitor, but will likely unload its stake once the company is public.
DIDI wants to be more than just a ride-hailing platform. In fact, it already operates different businesses around mobility, including electric vehicle charging networks, fleet management, car making, and autonomous driving. It also plans to expand internationally into markets that could include the U.K, France and Germany.
The company’s revenue shrank 10% in 2020 to $21.6 billion, due to the impact of COVID-19, but rebounded in 2021 as businesses reopened in China. Revenue more than doubled to $6.5 billion in the three months ended March 31, from $3.18 billion a year earlier. But over the same period losses also doubled to $1 billion.
Commentary: DIDI is one of the most anticipated listings of the year due to its huge size; it aims for a $60 billion valuation. Yet I wouldn’t say that it’s the most promising one. Ride-hailing is a fundamentally bad business model. As with Uber, DIDI is losing billions 💸🔥 and the expansion plans will result in price wars and more losses. But unlike Uber, DIDI faces one more risk, regulation. In fact, a few days ago it was revealed that Chinese regulators had begun an antitrust probe into the company. The Chinese government won’t let a second Alibaba emerge, so DIDI’s ambitious plans to become the leader in different sectors are questionable.
The company has set a price range of between $13 and $14 per American Depositary Share (ADS), and at the midpoint price of $13.5, its valuation would approximate $58.4 billion. At this price, its P/S ratio would stand at 2.7x, much lower than Uber’s 9x multiple. The reason is that investors are pricing into the stock the big risks the company faces. The exact date for the IPO is still unknown.
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Modernizing the service economy
Evercommerce ($EVCM) is a unicorn (private company valued at over $1 billion) you’ve probably never heard of. Think of it as the Shopify ($SHOP) for service companies. It offers a SaaS platform for small and mid-size businesses (SMBs) and currently focuses on 3 verticals, Home Services, Health Services, and Fitness & Wellness. Customers include service businesses such as gyms 💪, hair salons, and physicians among others. It helps them manage billing and payments, customer relations, marketing and other day-to-day operations. Its platform is a modern, cloud-based solution for companies that historically haven’t heavily relied on technology to manage operations.
Evercommerce is growing fast (via lots of acquisitions) and is close to breakeven. In 2020 revenue increased 40% y/y to $337.5 million and in Q1 of 2021, it increased 36% to $105 million. At the same time operating margin improved dramatically, from -13.3% in Q1 2020 to -6.1% in Q1 2021. The company could easily turn profitable over the next few quarters.
Commentary: Evercommerce modernizes the way service SMBs operate by offering an end-to-end cloud-based platform. It calculates its total addressable market at about $1.3 trillion as SMBs, its target customers, represent 99% of the US and the global economy. If it captures only 1% of its addressable market, Evercommerce is going to be a super successful company.
It’s priced its IPO at a midpoint price of $17 per share which translates into a market value of $3.3 billion. At this price, its P/S ratio will stand at 10x which is cheap for one simple reason. Evercommerce’s real revenue growth, excluding several acquisitions in 2020, was just 6.7%, as customers such as gyms, or hair salons were closed due to Covid. So investors seem to be cautious on the stock, pricing it at just 10x sales; a very reasonable multiple given its strong growth potential. The exact date for the IPO is also unknown.
It’s not something we typically do in this newsletter but let’s take a look at next week’s most dangerous IPO.👀
It’s the cybersecurity firm SentinelOne ($S), but why?? SentinelOne has developed an endpoint cybersecurity platform that uses patented behavioral AI to monitor and protect devices and respond to threats.
It’s a direct competitor to Crowdsrike ($CRWD) and growing faster but from a much smaller revenue base; its revenue surged 108% to $37.4 million in Q1 while Crowdstrike’s revenue increased 70% to $304 million, over the same period. SentinelOne’s revenue growth is the only interesting part.
If we look at the bottom line, it’s really bad. The company reported a net margin of -165% in Q1, even lower than the -124% it reported last year. The reason is that all costs — marketing, administration, R&D and cost of revenue — grew faster than revenue itself.
Cash flow margins are awful as well. Its main competitor, Crowdstrike is a cash flow king, with an impressive free cash flow (FCF) margin of 39% as of Q1. What about SentinelOne? In the first quarter, it reported an FCF margin of -83.3%, significantly lower than the already unhealthy -71.5% margin reported last year. In other words, it lost $0.83 per $ of revenue in Q1.😳
But the company becomes even more unattractive when we look at its expected valuation. SentinelOne targets a $7 billion market value that translates into a ridiculously high 70x sales multiple, even before a first-day pop. For reference, Crowdstrike is currently valued at 57x sales, despite the stronger fundamentals.
There’s no doubt that SentinelOne has built a strong product with customers such as Fiverr ($FVRR) and Singapore Airlines among others, but its financials are really bad. Losses are increasing and it seems that the company has no path to breakeven at all. At the same time, its main competitor is growing very fast as well, and with fat cash flow margins. Unless there’s progress on the bottom line, I see no reason to invest in this next gen cybersecurity specialist.