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Robinhood and 4 Other Broken IPOs That Could Be Buys

Warby Parker co-founders and co-CEOs Dave Gilboa, left, and Neil Blumenthal took the company public last September.

Richard Drew/AP/Shutterstock

After a bubbly year for initial public offerings, 2022 looks like a bust. Shares of many companies that came public last year are down 80% or more from their peaks.

“This is the IPO market’s worst selloff in a decade,” says Matt Kennedy, a senior strategist at Renaissance Capital. He cites excessive valuations for 2021’s offerings, rising interest rates, and worsening corporate fundamentals.

As high-growth stocks have cratered, the IPO market has largely dried up, with 39 deals raising $3.9 billion so far in 2022. That’s down 90% from the level in the same 2021 stretch. For all of last year, nearly 400 companies went public, taking in $142 billion, Renaissance says. The tally excludes special-purpose acquisition companies.

The wreckage has yielded some bargains, particularly in companies with good growth prospects and solid balance sheets. Some stocks to consider from the 2021 crop of IPOs are Allbirds (ticker: BIRD), Poshmark (POSH), Robinhood Markets (HOOD), and Warby Parker (WRBY). Kennedy says his firm’s clients are “scouring the list of IPOs of the past five years” in search of opportunities.

Investors can buy a broad range of recent IPOs through the Renaissance IPO exchange-traded fund (IPO), whose shares, at $30, are down almost 50% this year. They have performed considerably worse than the Nasdaq Composite, off 27%, and the S&P 500 index, down about 18%. The ETF is off almost 60% from its 2021 peak.

The Renaissance ETF holds 100 IPOs from the past three years. Its five largest investments— Uber Technologies (UBER), Snowflake
(SNOW), Crowdstrike Holdings (CRWD), Datadog (DDOG), and Zoom Video Communications (ZM)—account for about 25% of the fund.

Robinhood is emblematic of the 2021 IPO class because its stock is off almost 90% from a peak of $85 a share, to around $10. But the company sits on $6.2 billion, or about $7 a share, in cash. Its young, often aggressive base of investors helped drive the meme-stock frenzy of early 2021 in stocks such as GameStop
(GME) and AMC Entertainment Holdings (AMC).

Robinhood has its critics, notably Berkshire Hathaway (BRK.A, BRK.B) Vice Chairman Charlie Munger, who have said it encouraged short-term trading by novices and turned investing into a game. It also has fans. “This was never just about trading; it was about democratizing access to financial services,” says Devin Ryan, a JMP Securities analyst. He rates the stock Outperform, with a price target of $36.

Ryan sees newer products, such as cash-management accounts and expanded cryptocurrency services, boosting revenue later this year.

Down, Not Out

Many IPOs from the class of 2021 have plummeted in value from peak levels. Here are five potential turnarounds, all with ample cash.

Company / Ticker Recent Price YTD Change % Change from IPO Price* Market Value (bil) 2022E EPS Net Cash per Share
Allbirds / BIRD $4.68 -69.0% -68.8% $0.7 -$0.42 $1.61
Poshmark / POSH 11.02 -35.3 -73.8 0.9 -0.89 7.64
Rivian Automotive / RIVN 29.61 -71.4 -62.0 26.7 -6.46 16.86
Robinhood Markets / HOOD 10.21 -42.5 -73.1 8.9 -1.25 7.17
Warby Parker / WRBY 16.44 -64.7 -58.9 1.9 0.09 2.00
ETF / Ticker Largest Holdings
Renaissance IPO / IPO $30.40 -49.8% Uber Technologies
Snowflake
CrowdStrike Holdings
Datadog
Zoom Video Communications

*Reference priced use for WRBY which went public via a direct listing. E=estimate

Source: Bloomberg; Renaissance Capital; company reports

Robinhood operated at a loss in the first quarter, as revenue fell 43%, but cash burn was just $62 million. Management is aiming for profitability, based on adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, by year end.

Ryan says Robinhood’s platform and customer base could attract interest from potential acquirers, given the depressed share price. But he views the current valuation as “far below a level we believe the company might consider.”

Rivian Automotive (RIVN) is intriguing because its stock, which topped out at $179 after its IPO in November, got as low as $19 earlier in May. That valued the company at slightly more than the $15 billion of net cash on its balance sheet on March 31.

Shares have since rallied to nearly $29. The upstart maker of electric vehicles is losing about $5 billion annually as it seeks to ramp up production of high-end pickups and sport utility vehicles; output was just 2,553 vehicles in the first quarter. Profitably could be years away. Rivian says it has enough cash to last into 2025, when it could make more than 350,000 vehicles.

Wells Fargo analyst Colin Langan wrote recently that the company “has a low margin for error in all aspects of its business. Its limited production and commercial history leave much to be seen.” He has an Equal Weight rating and a $24 price target on Rivian.

A better EV play, profiled recently in Barron’s, could be General Motors (GM), which is funding its transition to EVs with huge profits from SUVs and pickups powered by internal combustion engines.

Warby Parker is disrupting the U.S. eye-care market by offering stylish prescription glasses for as little as $95, both online and in 169 retail stores around the country. The stock, at about $16, is down 70% from its 2021 high of $60.

The company was recommended by Henry Ellenbogen, the chief investment officer at Durable Capital Partners, at the Barron’s Roundtable in early 2022. Ellenbogen sees a significant growth opportunity for Warby Parker in offering glasses at about half the price of traditional competitors and expanding offerings like contact lenses and eye exams. Its overall market share is only about 2%.

The eyeware merchant now operates at a loss, and its first-quarter results fell short of investor expectations. Warby Parker sees 20% to 22% revenue growth this year, to about $655 million.

In an email to Barron’s, Ellenbogen said he sees revenue growth accelerating to the mid-20% range late this year from 10% in the first quarter. He forecasts margins topping 20% as Warby Parker gets “leverage on a new glass-manufacturing facility, maturing stores, and corporate expense.” The company is valued at $1.9 billion—about three times projected 2022 annual sales—and has $230 million, or $2 a share, in cash.

Allbirds has carved out a niche with eco-friendly footwear. Its signature wool sneakers, priced around $100 a pair, are popular in Silicon Valley. The company’s focus on natural materials, with a line of sneakers that uses eucalyptus leaves, has resonated with socially responsible investors.

The footwear producer went public at $15 in November, and the stock popped to $32 before falling to a recent $4.50 after a disappointing first-quarter profit report and lowered revenue guidance for the full year. Allbirds sees sales rising by 21% to 24% in 2022, to about $340 million. Some analysts don’t see profitability until 2024.

Allbirds stock might have bottomed, however, because the company, now valued at $700 million, has net cash of $240 million, or $1.61 a share, and a tangible book value of $2.58 a share. “While the path to profitability is arguably more cloudy amidst macro-driven factors, valuation unfairly puts Allbirds in-line with distressed retailers,” wrote Morgan Stanley analyst Alex Straton after the company’s recent earnings report. She sees a favorable risk/reward outlook for the stock, and has an Overweight rating and a $12 price target.

Companies such as Poshmark and RealReal (REAL) that offer online marketplaces for second-hand clothing and accessories have been hit hard as investors worry about high marketing expenses and future profitability. Poshmark, trading around $11, has more of a budget focus than RealReal. Items priced over $200 are estimated to account for about 20% of gross merchandise sales.

Poshmark has the better balance sheet, with nearly $600 million, or $7.64 a share, in net cash as of March 31. The company trades for about one times annual sales, excluding cash. Poshmark is expected to lose $1 a share this year, but cash rose in the latest quarter.

After its latest results, JMP Securities analyst Andrew Boone wrote that Poshmark is showing “early signs that marketing efficiency is returning,” and that it continues to “upgrade its core service.” He rates it Outperform, with a $20 price target.

In Friday’s selloff, which briefly tipped the S&P 500 into a bear market, these broken IPOs shed more value. But that could make their shares even more inviting.

Write to Andrew Bary at [email protected]

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