The U.S. saw 480 initial public offerings in 2020, representing a new all-time record and a 106% increase compared to 2019. This wave of public offerings aimed to take advantage of the booming demand for stocks to tap into capital markets at more favorable prices.
Even so, there are still plenty of companies that have not yet used public offerings to raise funds, and many plan to do so in 2021. Wall Street's wheeling and dealing is being driven by a combination of recessionary conditions in the economy, low interest rates, digital transformation and venture capital, all of which are making going public increasingly attractive. While some of the new public companies could represent opportunities for investors, the wave of IPOs is reminiscent of the dot-com bubble, so investors may want to exercise caution.
Three of the most highly anticipated IPOs of 2021 happened this past week: Petco Health and Wellness Co. Inc. (WOOF, Financial), Poshmark Inc. (POSH, Financial) and Playtika Holding Corp. (PLTK, Financial). We will take a look at these companies to see if they offer attractive opportunities for investors, or if they are tapping into capital markets to help stave off deeper-rooted issues.
Petco Health and Wellness
Veteran pet supply retailer Petco Health and Wellness (WOOF, Financial) made its latest public market debut on Jan. 14 at an initial public offering price of $18 per share for a total offer amount of $864 million.
This new IPO marks the 55-year-old company's third time going public. It had previously been taken private in 2016 via a leveraged buyout.
Since the previous buyout, the company has given itself quite a makeover by investing heavily in veterinary, grooming and other on-site services as well as building out its e-commerce offerings. Like many other brick-and-mortar retailers, it is using its network of store locations to rapidly expand e-commerce with ship-from-store and in-store pickup options.
Petco CEO Ron Coughlin had the following to say about the company in an interview with CNN Business:
"We are the only retailer that offers all the pet parents' needs in one place. Whether you want to get your pet vaccinated, a check-up, groomed, trained, or buy human-grade food — we're the only ones who can do it all under one roof."
Given the pandemic situation, one thing investors should be on the lookout for in companies tapping into capital markets is their financial health. Pandemic-induced lack of demand does not seem to be a concern with Petco, as the company actually continued to grow overall in 2020 after the initial shocks. Operating income rose by 84% during the first three quarters of the year to $127 million.
On the other hand, the company is still saddled with $3.2 billion in debt from its leveraged buyouts in 2000 and 2016. Petco has been struggling under a high debt burden for far longer than the Covid-19 situation has been affecting the economy. In fact, in its S-1 filing, the company warned that "substantial indebtedness could adversely affect our cash flows and prevent us from fulfilling our obligations under existing debt agreements."
According to Coughlin, the company will use all of the proceeds from its IPO to pay down debt and reduce its interest payments. While this will undoubtedly help improve the company's chances of staying afloat and posting improving earnings results, it doesn't exactly fix its less-than-stellar track record.
Poshmark
Social media-driven resale marketplace Poshmark (POSH, Financial) went public for $42 per share on Jan. 14 for a total offer amount of $277 million.
Founded in 2011, Poshmark is a relatively new player that is tapping into capital markets due to the sharp uptick in demand for its offerings fueled by the pandemic.
Poshmark makes its money by connecting buyers and sellers through its internet marketplace, taking a cut from both parties for each transaction. Users can buy things like second-hand clothing, shoes and accessories on Poshmark, or sell things from their own closets.
The company is optimistic that its tailwinds will be permanent, with the pandemic simply speeding up the expansion of its business activities and its turn to profitability. The company did manage to turn a net profit of $20.9 million in the first three quarters of 2020 compared to a net loss of $33.9 million over the same period a year ago, while revenue rose 28% to $192.8 million.
E-commerce has undeniably been growing in recent years, with the pandemic accelerating the demand at warp speed, and the online resale space was one of the later spaces developed as bargain-hunters have historically been more likely to go to physical stores than customers looking to buy new.
The real challenge will be successfully differentiating itself from competitors enough to gain market share and some sort of moat. Since it is in a hot industry, Poshmark will be facing competition from other pure-play names such as TheRealReal (REAL, Financial) and ThredUp, and there is always the danger of bigger names trying to get a slice of the pie.
CEO Manish Chandra aims to use "social commerce" to provide a unique offering to customers and differentiate itself from competitors, facilitating a more casual environment where sellers and buyers chat about items. Regarding the post-pandemic market, Chandra said:
"We see people actually going to events, going to offices, actually participating in the world as an accelerant, because 45% of the items we sell are apparel… That's really something that's not seen that level of excitement as it will be when we actually interact in the physical world."
Playtika Holding
Mobile gaming company Playtika Holding (PLTK, Financial) had its IPO on Jan. 15 with shares going for $27 apiece, raising around $1.88 billion and exceeding the original target of $22 to $24 per share.
Playtika has had quite a colorful ownership history considering it was founded in 2010. It was acquired by Caesars Entertainment Inc. (CZR, Financial) in 2011, and in 2016 it was purchased by private company Giant Investment Co. Following the IPO, Playtika will continue to be ultimately controlled by Giant, which maintains 80% voting power.
One of the leading developers of mobile-based casino games, Playtika still offers the popular Caesars Casino game from its time as a Caesars subsidiary, in addition to names like Bingo Blitz and Solitaire Grand Harvest. In total, Playtika owns 20 mobile games, with more games in the top 100 than any other company.
With its leadership position in the mobile gaming market, it comes as no surprise that Playtika has a proven history of profitability. Over the trailing 12 months, the company generated $2.3 billion in revenue, $46.1 million in net income and $815.2 million in adjusted Ebitda.
However, the company does come with its share of debt, having paid $645 million for acquisitions over the three-year period from 2017 to 2019. With $2.3 billion in debt and another $550 million undrawn line of credit at the ready, the company acknowledges that it is highly leveraged, and that this leverage puts it at risk.
Those considering investing in the stock should also be aware that compared to many other companies, Playtika has little control over its own direction. The owners of the platforms it operates on, Apple (AAPL, Financial) and Alphabet (GOOG, Financial)(GOOGL, Financial), could decide at any time to remove Playtika's games, a right which was exercised in the past when Apple banned Epic Games from iOS over a dispute. Additionally, the company is controlled by its parent company Giant, which is in turn controlled by Giant's owner Yuzhu Shi. The company's S-1 filing included the following statements regarding the matter of ownership:
"As long as Yuzhu Shi continues to control shares representing a majority of our voting power, he will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors."
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
Read more here:
- Delta Reports Encouraging 4th-Quarter Results
- Spinoffs Roundup: These Companies Became Independent in 2020
- Biggest 4th-Quarter Trades of the Parnassus Endeavor Fund
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
