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All Contents © 2017The Kiplinger Washington Editors
By Tom Taulli
| December 2016
Even though the market for initial public offerings has been light in 2016, we’ve still seen some noteworthy deals. For instance, Acacia Communications, Inc. (ACIA) and AVX Corporation (AVX) — two of the market’s best IPOs this year — have nearly tripled, at 190% and 180%, respectively. Past that, eight offerings have doubled, and 13 returned between 50% and 100%.
But why was 2016’s IPO volume so meager?
Well, the grueling correction during the first year stayed many a hand. Volatile, negative markets are not the right place for a budding publicly traded company. Moreover, the wild presidential race stirred up its own batch of uncertainty.
However, now that we’ve elected a president and things are settling down, we can look to 2017 — and the IPO environment looks awfully promising. Improved clarity on the political landscape and a likelihood of more corporate-friendly taxes should spark bullishness and risk appetite.
The following is a look at the 10 best IPOs that I expect to come to market and thrive in 2017. I look to Ron Heinz, a venture capitalist at Signal Peak Ventures who thinks an IPO should have a clear path to profitability within an 18-month horizon or a dominant market position that is combined with exceptional top-line growth.
Those are great measures, and they guide this list of the best IPOs to buy in 2017:
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Spotify, which operates a popular streaming music service, is actually under pressure to go public. The company has been around for more than a decade, so investors want to get paid.
But Spotify’s recent debt financing is also a factor. According to the terms — which values the company at $8.5 billion — the interest rate will increase every six months (with a cap of 10%) until the company executes a public offering.
Spotify has built a strong platform that now boasts 40 million paying users — up from 30 million in March — thanks to key drivers such as family plans and free tiers.
Be aware of several risk factors, though. Spotify continues to lose money, and it has no long-term licensing agreements with the major labels, which could expose the company to potentially higher rates. Then there is the intense competition from operators like Apple Inc. (AAPL), Amazon.com, Inc. (AMZN) and Alphabet Inc. (GOOG), which all sport their own music services.
But I think that’s a reason why Spotify could get a better valuation on an IPO.
Pinterest, which operates an app that allows users to pin images and videos as well as engage with different groups, is gearing up for a public offering, and it could come soon. The company recently hired Todd Morgenfeld — a former finance vice president at Twitter Inc (TWTR) — to be chief financial officer.
The timing is spot-on, as Pinterest continues to gain traction. The company boasts about 150 million monthly active users (MAUs), which compares to 100 million a year earlier. Roughly 80 million of those reside outside the U.S.
Pinterest is an excellent platform for monetization, too. For Pete’s sake, the main activity there is consumers posting products that they love!
For the current year, Pinterest projects that revenues will come to about $300 million, roughly triple what it made in 2015. That kind of attention will attract IPO investors like a magnet.
And note that those revenues have mostly come from traditional online ads. However, Pinterest is gradually implementing so-called “buyable pins,” which should be an even more effective form of monetization.
Invitation Homes has made a confidential filing for an IPO, which means the S-1 has yet to be disclosed. However, expect an offering to happen sometime during the first half of 2017.
Invitation Homes owns about 50,000 single-family homes, which are rented out. The company has operations in 14 areas, including Los Angeles and Seattle. IH’s backer is Blackstone Group LP (BX) — it’s one of the world’s largest alternative investment firms, and it manages more than $100 billion in real estate investments.
The Invitation Homes IPO will be structured as a real estate investment trust (REIT), which will translate into hefty dividend payouts. If you want an idea of what to expect, note that two similar firms on the market — American Homes 4 Rent (AMH) and Colony Starwood Homes (SFR) — have logged returns of 25%-plus this year.
The Invitation Home deal might be one of the best IPOs of 2017. It’ll at least be a large one, potentially raising $1.5 billion at a valuation of $7.5 billion.
Back in 2012, Expedia Inc. (EXPE) plunked down $628 million for Trivago, an online comparison travel site. The deal has been a winner, as an IPO now appears likely to fetch a premium valuation.
Trivago’s mission is simple: It aims to “be the traveler’s first and independent source of information for finding the ideal hotel at the lowest rate.” It does so by providing access to 1.3 million hotels in more than 190 countries, then crunching huge amounts of data to provide more personalized results.
For the past 12 months (as of the end of September), Trivago logged about 1.4 billion visits that turned into a hefty 487 million qualified referrals.
Growth has been impressive. From 2014 to 2016, revenues for the Europe-based company jumped from €309.3 million to €585.0 million, and adjusted EBITDA climbed from €3.5 million to €16.3 million.
Trivago filed its S-1 in mid-November, but with the year almost out, expect the Trivago IPO to come in early 2017.
“Quote-to-cash” software firm Apttus has not been shy about its intentions about pulling off an IPO. In various interviews, the company’s executives have noted that they plan to make a deal during the first half of 2017.
Apttus is unique among Silicon Valley operators. The company did not take outside capital for about seven years or so. Instead, Apttus focused on leveraging partnerships, such as using the Salesforce.com, Inc. (CRM) platform. This not only got Apttus to market faster, but also capitalized on existing customer relationships. It also helped that Apttus targeted a pain point for companies — managing the complex and tedious process of making quotes for customers as part of the enterprise sales cycle.
Over the years, Apptus has expanded its offerings to include revenue management, billing and e-commerce.
The strategy has paid off in a big way. Revenues are expected to hit $150 million this year, and Apptus believes it will return to positive cash flow next year.
Airbnb, which allows people to rent out rooms, got its start during the Great Recession of 2008. But the timing was prescient — after all, the company allowed homeowners and renters to earn extra income while allowing travelers to get better deals.
Airbnb has faced competition but quickly took an overwhelming lead in the fast-growing industry. And unlike many other Silicon Valley startups, the company has been a big-time money maker. Three years ago, Airbnb made $250 million in revenues. For 2017, Airbnb is forecast to generate about $900 million, and the company believes its sales will hit an astounding $10 billion (thanks in part because of its expansion into foreign markets).
If this happens, Airbnb will become the much-sought “next Facebook Inc. (FB).”
“AirBnB is the top IPO candidate for 2017, hands down,” Mike Smerklo, co-founder and managing director of Next Coast Ventures, told me in an interview. “If you think about what makes a successful IPO, it is the combination of marketshare, brand awareness, executive leadership and business model. AirBnB has all of that in spades.
“But what turns a great IPO into a great long-term investment is if the company has a ‘next act’ lined up and AirBnB’s recent strategy announcement — called Trips, which allows travelers to book tours led by local experts — shows real depth in business model and strategy.”
Palantir Technologies, which was founded in 2004 and backed by super-VC Peter Thiel — himself a backer of Donald Trump and part of his transition team — is a secretive organization that provides machine-learning systems for customers who want to combat fraud and even terrorism.
But we’ll likely learn a lot more about Palantir, because the company appears ready to pull off an offering.
Palantir, which has already raised roughly $2 billion, is valued at a sweet $20 billion and is expected to reach profitability next year. Going forward, Palantir might receive a lift from big changes in U.S. politics.
“Palantir will benefit from the recent election beyond the Thiel/Trump connection,” Ethan Ayer, CEO of Resilient Network Systems, told me in an interview. “It has been 11 years since all three branches of government were controlled by the pro-business Republicans — and this time is even more powerful. Democrats will be fighting bigger fires, ‘fence-sitters’ will be out of excuses to delay purchases, and procurement cycles will speed up.”
Palantir recently signed a $222 million contract with the United States Special Operations Command. More deals like this could be in the offing.
The cloud storage industry is massive and has attracted mega-operators including Microsoft Corporation (MSFT), Alphabet and Amazon. These companies not only have enormous resources, but can also charge lower fees because they make heftier profits from other business segments.
It’s not a fun environment to try to compete in, but Dropbox thinks it can prove the bears wrong. And it should get a little ammunition for its fight with a 2017 IPO.
Dropbox has a trusted brand and a large user base of more than half a million people. The company also has been investing in developing tools for enterprise, which should allow for better monetization. The customer base for business users is over 200,000.
Dropbox has prepped for an IPO by being diligent about finding inefficiencies. The company is now cash-flow positive, which should get the attention of IPO investors.
Funding in Silicon Valley has slowed down this year, but a few categories are still ginning up interest.
One is mobile payments. Case in point: Stripe, which recently raised $150 million at a $9.2 billion valuation — up by about 2X on a year-over-year basis.
Stripe operates a sophisticated platform that allows merchants and app developers to process payments. The system is extremely easy to implement and involves a transactional business model. Some marquee clients include Lyft and Target Corporation (TGT).
The market opportunity is also enormous. According to eMarketer, U.S. volume alone is forecast to jump from $8.71 billion in 2015 to a whopping $210.45 billion by 2019.
So why an IPO? Well, the payments space is extremely competitive, with rivals like Apple and Alphabet as well as traditional financial institutions. So having a war chest of capital and also having public stock as currency for mergers & acquisitions should be extremely helpful.
However, in light of the strategic importance of the mobile payments industry, it would not be surprising to see Stripe ultimately sell out.
Snapchat parent Snap Inc likely will pull off the most eagerly awaited IPO of 2017. The company is expected to raise a couple billion dollars at a valuation of more than $20 billion.
The metrics on Snapchat are mouth-watering. The company boasts, among other things:
Snapchat has been able to turn this into strong financials. According to TechCrunch, the company posted revenues of $59 million in 2015, which are expected to jump to $250 million to $350 million this year. Next year, sales could hit $1 billion.
But Snapchat is trying to be more than just an interesting app. The company recently launched Spectacles — glasses connected to your smartphone and allow you to take photos and videos. They’re an example of augmented reality (AR) — one of the hottest trends in tech — and they could sell well during the holiday season.
Just another thing to add pizzazz to what will be an extremely hyped Snapchat IPO.
This article is from Tom Taulli of InvestorPlace.
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