We will remember 2020 for a great many things — the novel coronavirus pandemic, Australian bushfire season and the 2020 U.S. presidential election, to name a few. From the market’s perspective, 2020 is also the year the traditional IPO (initial public offering) became obsolete. Special purpose acquisition companies, or SPACs, outpaced initial public offerings, with a record $78 billion raised in the U.S. this year. Even the best IPOs could not compete with the euphoria surrounding the SPAC space.
The deal volume in 2020 beat the combined total of SPACs in all previous years and made up approximately 45% of this year’s record $177 billion IPO volume. But IPOs are still alive and kicking. U.S. companies raked in $435 billion from stock sales, eclipsing the previous high of $279 billion set in 2014. Investors chose to look past political and macroeconomic uncertainties to pour capital heavily into new vehicles, powering the major U.S. exchanges to record-setting highs.
This list brings you five of the best IPOs that are ready to make a splash this year. Although the stocks identified are volatile, they have solid outlooks and excellent business models. As we move further along the new year, expect these to keep gaining ground.
We start our list of best IPOs with a controversial pick. Palantir (PLTR) offers organizations solutions to manage large disparate data sets to gain insight and drive operational outcomes. Founded in 2003 with capital from investors, including the Central Intelligence Agency (CIA), the company has two major offerings.
First, is its Gotham software platform, which focuses on the government intelligence and defense sectors. It operates its Foundry software platform to become the data operating system for companies and industries for commercial clients.
The secretive and often controversial big-data company founded by Peter Thiel went public through a direct listing on the New York Stock Exchange on Sept. 30, 2020. The debut netted the company a valuation of roughly $21 billion.
However, not everyone is a fan. New York Rep. Alexandria Ocasio-Cortez and Illinois Rep. Jesús “Chuy” García coauthored a letter that urges the SEC’s warning over Palantir’s efforts to take the company public, cautioning the regulatory body over details the progressive congresswoman says were “omitted” in the company’s disclosures.
The lack of political support is not a reason to shy away from investing. Palantir clients include the U.S. Army, the Navy and Immigration and Customs Enforcement (ICE). It has two contracts with ICE. Combined, those contracts equal $92 million. One involves the agency’s Investigative Case Management internal database and the other is for FALCON software. Palantir’s role in ICE immigration raids is another bone of contention. But it’s no secret that its platform is useful.
The important thing to note here is the kind of names involved. These are institutional giants that offer much more safety and stability than a host of commercial clients. That’s why, politics aside, PLTR stock is a sure bet.
DoorDash provides online food-delivery logistics services. As of January 2020, it had the largest food-delivery market share in the U.S. DoorDash (DASH), GrubHub (GRUB) and Uber’s (UBER) Uber Eats, together account for some 80% of the sector’s revenue. DoorDash held its initial public offering on Dec. 9, 2020. The delivery company’s shares closed at $190 apiece, 86% north of its IPO price of $102 a pop, valuing the company at $72 billion.
The company couldn’t have asked for a better year to debut. The pandemic has ravaged restaurants that are struggling to survive due to government-mandated closures. Meanwhile, food-delivery applications like DoorDash have thrived. In the first nine months of 2020, revenue tripled year-over-year to $1.92 billion, and orders surged to 543 million through September, compared with 181 million a year earlier.
However, it’s worth noting that DoorDash operates in a very competitive market. Uber Eats is not a distant second, and with the company’s deep pockets, it can afford to play catch up. DoorDash’s straightforward menu layout, individualized customer support, and frequent exclusion of the small-order fee for one-person orders make it a better application than Uber Eats at the moment, though.
DASH stock is trading at 18.6 times price-to-sales.
Next on our list of best IPOs is Airbnb (ABNB). It seems strange that the company would choose to debut this year. Covid-19 has brought the world to a virtual standstill. And although things are on the mend, we are hardly close to seeing pre-pandemic travel trends. ABNB stock’s excitement stems from its asset-light model and long-term growth prospects, leading D.A. Davidson to say Airbnb has a market opportunity of more than $2 trillion. Shares have lost a lot of steam since debuting at $68 apiece on Dec. 9.
Still, the company is in a much better position than Hilton (HLT), Marriott (MAR) and InterContinental Hotels (IHG). With consumer discretionary incomes depressed, travelers are more likely to avoid big-ticket names. That’s why the pandemic is actually a short-term tailwind for Airbnb until the economy starts whirring again. Plus, hosting and managing a website isn’t as costly as managing hotels and resorts.
Undoubtedly, there are a lot of positive catalysts for the firm. But it’s also vital that we speak about overvaluation concerns. Gordon Haskett analyst Robert Mollins believes Airbnb’s IPO surge “more than stretched” the firm’s share prices. A majority of analysts covering the stock rate shares a hold rather than a buy, and that kind of sentiment is echoed in the markets. The lack of profitability, in particular, is severely hurting investor sentiment. Airbnb was one of the few unicorns — privately held startups with a value of over $1 billion — that was profitable before its debut.
However, sales have fallen 32% in the first three quarters of 2020. Gross margins are excellent but administrative, and tech costs are putting a severe dent in its bottom line. Its reportedly spending more than $100 million a year on upgrading its platform. In the long term, the business model and outlook remain rock-solid, making it one of the best IPOs of 2020.
In many ways, you could describe 2020 as the year of the electric vehicle (EV). Both Tesla (TSLA) and Nio (NIO) have had blockbuster returns during the year. All over the world, there is a strong shift toward electric vehicles.
California will phase out the sale of all gasoline-powered vehicles by 2035 in the hopes of reducing greenhouse gas emissions. Meanwhile, the sales of new energy vehicles (NEV) in China, the world’s biggest auto market, will increase to 20% of overall car sales by 2025 from just 5%. That increase will be 50% by 2035, according to projections by the China Society of Automotive Engineers.
Amid this backdrop, it’s not surprising that XPEV stock is doing well. In the last three months, shares have gained 161.3%, and the momentum doesn’t seem to be slowing. For its part, the company is doing very well. In the fourth quarter, XPeng (XPEV) delivered 12,964 vehicles, a 303% increase year-over-year and a 51% increase sequentially. In aggregate, the EV maker has delivered 27,041 vehicles in 2020, a 112% increase year-over-year. Analysts expect revenues to grow by 152.3% next year.
As with most EV stocks, overvaluation is a major concern. Shares are trading at 58.3 times price-to-sales. Among the top U.S.-listed Chinese EV companies, this is the cheapest stock you will find.
Cloud-computing company Snowflake (SNOW) debuted in a massive $3.36 billion initial public offering on Sept. 16, 2020. One of the best IPOs of 2020, shares opened at more than double their IPO price of $245 apiece, a gain of 104% gain at the opening bell, the third-highest such pop for an IPO of $1 billion or more on a U.S. exchange.
Carl Eschenbach, a partner at Snowflake investor Sequoia and a board member, remarked, “There is no centralized data cloud other than Snowflake that can combine all of that data and give you the business insights you want in a very fast way.”
All good, right? Well, the stock eventually made the customary plunge post-IPO after more than tripling since debuting in September. The reason for the steep fall is the expiration of lockups that free company insiders from selling restrictions on tens of millions of shares.
Shares remain an excellent investment, though, with long-term fundamentals looking extremely attractive. That much was confirmed when the company unveiled its third-quarter earnings report that revealed triple-digit revenue growth.
For me, shares are best for position trading because the company is at a nascent stage. There is a huge addressable market that will only grow. Companies quickly realize that the cloud accommodates an agile and modern architecture and working style. It’s a secular trend that was only exacerbated by the pandemic.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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