Even though the COVID-19 pandemic resulted in the biggest economic crisis in a century, the stock market has recovered and galloped ahead since its correction last March. This positivity was reflected in the primary market, which witnessed a massive surge in initial public offerings (IPOs) on U.S. exchanges last year. FactSet data shows that the volume of IPOs in 2020 more than doubled from 2019 to a record 494 IPOs, the highest number in the past two decades.
An unprecedented rally in stocks from the technology sector since the onset of the pandemic has been justified by consumers’ reliance on technology during the health crisis. Consequently, tech IPOs attracted the most investment flows. Investors jumped to invest in new tech players as the global pandemic created a hunger for the products and services of such companies. This has made them trade at nose-bleed valuations, in line with other established tech companies.
However, many investors have failed to acknowledge that recently listed companies are also extremely volatile and carry significant risks. While blue-chip companies are established players that generate a steady stream of income, IPOs are companies that are betting on expanding their top lines at a rapid pace. But given the rapid pace of digitization, investors have been enamored (or perhaps even blinded) by the growth prospects and potential of the tech space.
Snowflake, Inc. (SNOW), DoorDash Inc. (DASH) and Palantir Technologies (PLTR) are three recently-listed companies that we think have run too far too fast. It appears to us from their current valuation multiples that they are due for a price decline. So, it’s better to avoid these stocks for now.
Snowflake, Inc. (SNOW)
California-based SNOW is an international cloud-based data platform that enables customers to consolidate data into a single source to deliver meaningful business insights, build data-driven applications, and share data. Various organizations use the platform across a vast range of industries. SNOW has been around since 2012 but went public on September 16, 2020.
SNOW’s management had initially planned an IPO price of $75 - $85. The issue ultimately priced at $120 per share. And on its first day of trading, the price gained 113% and became the biggest software IPO of all time. The company had commitments to buy its shares from Warren Buffett’s Berkshire Hathaway (BRK.B) and Marc Benioff’s Salesforce Ventures (CRM). SNOW is currently trading at $299.47.SNOW recently entered into a partnership with Abacus Insights, a leading healthcare data integration and interoperability platform, to provide the healthcare industry with seamless access to data insights at scale. The partnership will address the healthcare industry’s ongoing need to liberate siloed data and unlock meaningful insights that can achieve more personalized care and improve health outcomes.
SNOW is scheduled to issue its fiscal fourth quarter and full-year 2021 ended January 31, 2021 earnings report on March 3, 2021. In its third quarter, the company generated product revenue of $148.5 million, representing 115% year-over-year growth. SNOW had 3,554 customers at the end of the quarter, with a net revenue retention rate of 162%. However, its operating losses widened to $169.5 million from the year-ago loss of $90.1 million. Additionally, the company reported a loss of $1.01 per share.
In terms of forward p/s, SNOW is currently trading at 146.19x, 3270% more expensive than the industry average 4.53x. Clients of all different sizes in a wide array of industries rely on SNOW’s platform. However, the company is not yet generating profits yet and its current valuations are not justified. The stock has lost 1.4% in the past month but still has a year-to-date gain of 6.4%.
SNOW’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of F, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
SNOW has a grade of D for both Growth and Stability. It is ranked #81 of 82 stocks in the C-rated Technology - Services industry.
In total, we rate SNOW on eight different levels. In addition to the POWR Ratings grades I've just highlighted, you can see the SNOW’s ratings for Value, Momentum, Sentiment, and Quality here.
DoorDash Inc. (DASH)
DASH operates a logistics platform that connects merchants, consumers, and dashers in the U.S. and internationally. It operates DoorDash marketplace, which provides an array of services that enable merchants to solve mission-critical challenges, such as customer acquisition, delivery, insights and analytics, merchandising, payment processing, and customer support. It also offers DoorDash Drive, which is a white-label logistics service.
Since its inception in 2013, DASH has achieved remarkable growth and has been a major disrupter in the U.S. food delivery space. It completed its IPO in December 2020. DASH priced its shares at $102, above its original range of $90-$95. But the stock skyrocketed following its debut on December 9, 2020 and closed up more than 85% after it began its trading at $182 per share that day. DASH has gained more than 42% year-to-date but is currently trading at a 20.7% discount to its 52-week high of $256.09.
DASH recently acquired California-based automated food preparation startup Chowbotics, which is known for its salad-making robot, Sally. DASH plans to offer this technology to its merchants. The acquisition marks another step in the mainstreaming of food prep automation using robots to carry out routine kitchen tasks that traditionally were fulfilled by humans. In January, DASH inked a deal with supermarket chain Albertsons Companies (ACI). which has more than 2,700 stores in the U.S. Albertsons has 18 different chains and it will use DoorDash for its growing home delivery market.
DASH will release the fourth quarter and full-year 2020 financial results on February 25, 2021. In the first three quarters of 2020, DASH sales rose by almost 200% year-over-year to $1.9 billion. However, the company has yet to turn a profit. In the second quarter, DASH reported its first-ever profitable quarter as its revenue rose by 214% and its monthly subscribers tripled on the back of pandemic-induced demand and its reduced spending on marketing. However, DASH still has a cumulative loss of $149 million over the first nine months of 2020.
In terms of forward p/s, DASH is currently trading at 22.57x, which is significantly higher than the industry average 1.36x. Despite witnessing heightened pandemic demand, DASH could not turn its financials around and the company is clearly going to take some time to become profitable. In addition, DASH faces strong competition from companies such as UberEats of Uber Technologies, Inc. (UBER) and GrubHub Inc. (GRUB). The stock has lost more than 2% in the past month and may lose further if it fails to impress the Street with its scheduled earnings call.
DASH’s weak fundamentals are reflected in its POWR Ratings. DASH has a grade of D for both Value and Momentum. In the C-rated, 46-stock Internet - Services industry, it is ranked #25.
Beyond what we stated above, we also have given DASH grades for Growth, Stability, Sentiment, and Quality. Get all the DASH ratings here.
Palantir Technologies (PLTR)
PLTR is a data analytics company that builds and deploys software platforms for the intelligence community in the U.S. The company serves the U.S. government primarily and has partnerships with several military and civilian federal agencies in addition to some commercial customers. It offers Palantir Gotham, a software platform that enables users to identify patterns hidden deep within datasets, and Palantir Foundry, a platform that transforms the way organizations operate by creating a central operating system for their data.
PLTR’s public market debut came in on September 30, 2020, 17 years after it was founded. PLTR stock went public via a direct public offering (DPO), where no new shares were offered. Instead, existing shareholders sold up to 20% of their stakes to new investors. The stock opened at $10, with 1.65 billion shares outstanding. However, PLTR closed its first trading session at $9.50.
PLTR has won a series of important government contracts of late. The company recently entered a major partnership with International Business Machines (IBM) to integrate its application-building tools with IBM's hybrid cloud platform. The collaboration is intended to help companies more easily create and implement artificial intelligence (AI) powered apps that can help them make better use of their data. Palantir and IBM plan to launch the product in March. PLTR’s recent Demo Day was a success, which did not fail to impress the Street and industry experts.
PLTR is scheduled to release its fourth quarter earnings results tomorrow. In the third quarter ended September 30, 2020, the company reported $289.4 million in revenues, increasing 52% year-over-year. Revenue from government customers was $163 million, representing 68% year-over-year growth, driven by a surge in the demand for AI-supported defense and healthcare data analytics. PLTR reported a loss of $0.94 per share and the company is not expected to be profitable for a few more years.
In terms of forward p/s, PLTR is currently trading at 51.88x, 1,096% more expensive than the industry average 4.34x. In terms of forward p/e ratio, PLTR is trading significantly higher than the industry average (430.46 vs 28.01). However, the stock is up a whopping 28% in the past month due to its recent alliances and developments.
PLTR generates a larger portion of its revenue from the government but has still not generated profits despite operating for nearly two decades. In fact, some of its U.S. government contracts. especially the one with Immigration and Customs Enforcement (ICE) to track undocumented immigrants, are controversial. Hence, it is too early for investors to incorporate the success of PLTR’s commercial business in its share price yet. In addition, PLTR could witness near-term weakness as the company’s lock-up period, which restricts insiders from selling its shares in the open market, is expiring this month and executives could be eager to cash out at an inflated price.
It’s no surprise that PLTR has an overall rating of D which equates to Sell in our POWR Ratings system. PLTR also has a grade of D for Value and Stability. In the D-rated, 13-stock Software - SAAS industry, it is ranked #11.
Click here to see the additional POWR Ratings for PLTR (Growth, Momentum, Sentiment, and Quality).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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SNOW shares were trading at $292.12 per share on Tuesday afternoon, down $7.35 (-2.45%). Year-to-date, SNOW has gained 3.81%, versus a 5.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.3 Overvalued IPO Stocks to Avoid at All Costs appeared first on StockNews.com