We’re six weeks into 2021, and now that the year is getting rolling, a few things have come clear.
First, and most important, the COVID pandemic may finally be on the wane. Cases and deaths are down by one-third over the past three weeks, more than 1 million people daily are receiving one of the several available vaccines – and that’s just in the US. Meanwhile, even though January’s job numbers were grim, other economic signs are pointing up: the housing market is sizzling, with a 12% year-over-year gain in prices, the manufacturing index is at a five-year high, and even though there are still 10 million people officially unemployed, there are also 6.5 million open jobs in the States. First quarter GDP grew 4.3%, and some analysts are predicting Q2 to see growth as high as 10%.
The surge in optimism has come along with a continuing tide of IPOs. Last year, despite the long-term corona crisis, there were 218 initial public offerings – the most since 2014 – and the momentum remains strong in the opening weeks of 2021. This year, companies are hoping to replicate the successes of the past 12 months, when the 218 IPOs raised over $80 billion new capital, and saw an average day-one return of 42%.
There are some cautionary notes for investors, however. The first is that IPOs, especially for tech firms, have been posting heavy gains in their first days of trading; in 2020, the median first day closing price of a tech IPO was triple the average of all IPOs. These strong early gains limit the future upside of these stocks. Which brings us to the second point – that nearly half of all IPOs end up in the red after their first five years of public trading. This isn’t to say that investors should avoid these stocks – but that they need to keep their eyes open, and remember that investing is a long-term game.
So, keeping that background in mind, let’s look at three hot stocks which have recently held their IPOs. We’ve opened up the TipRanks database to get the latest info on them, and the results make great reading. These are buy-rated stocks, and some analysts believe they’ve got potential for double-digit gains.
The first IPO we're looking at is Playtika, a leader in the online and social gaming niche. The company develops and publishes social casino and casual games for the mobile market, offering them on a free-to-play, pay-to-upgrade model. Games are available through social media and mobile platforms, and players can access customized daily special features. Playtika boasts a player base exceeding 35 million monthly active users.
The games and the user base are valuable assets, and formed the foundation for Playtika’s public offering. The company started trading on the NASDAQ index on January 19, with an opening price of $27 per share. That was above the $22 to $24 range expected, and set a strong tone for the IPO. In all, the company sold 18.5 million shares in the initial offering, and brought in $1.9 billion. Playtika is prime example of a successful IPO, attracting investors and brining the company’s total market cap to $13.9 billion in its wake.
Playtika’s opening was the year’s biggest IPO so far. Investors will get a closer look at the company, and a hint of its long-term investment quality, on February 25, when Playtika releases its Q4 earnings results. In the meantime, it is worth noting, first, that Playtika saw $2.29 billion in revenue for the 12 months ending on September 30, 2020
Wedbush analyst Michael Pachter covers this company, and sees it as a solid option for investors.
“We view Playtika shares as a compelling investment given… its unrivalled portfolio of genre-leading games, its differentiated live services infrastructure and proprietary Playtika Boost Platform, and a long runway ahead for additional growth… For the nine months ended September 30, 2020, Playtika had nine of the top 100 grossing mobile games… more than any other company,” the 5-star analyst noted.
In line with his comments, Pachter rates PLTK an Outperform (i.e. Buy), and his $42 one-year price target suggests an upside of ~24%.
A major gaming company is sure to get plenty of attention, and Playtika already has 10 analyst reviews. The breakdown of 8 Buys and 2 Holds gives this new stock a Strong Buy analyst consensus rating. Shares are currently trading for $33.91, and the average price target leaves room for a 10% upside.
Driven Brands Holdings (DRVN)
Next up is Driven Brands, the largest automotive services company in the North American market. The company meets a wide range of automotive needs, from oil changes and maintenance to paint work and collision repair, to glass chip fixes and car washes. Driven Brands is a holding company, with subsidiaries including Maaco, Meineke, and Take 5 Oil Change. The network of brands operates in 4,100 outlets in 15 countries, generating $3.8 billion annual sales.
In its IPO, Driven Brands put 31.8 million shares of common stock on the market, at price of $22 each. The shares closed their first day trading at $26.69, and Driven netted $652 million in usable capital from the sale. The proceeds of the opening will be used to pay down a $722 million debt incurred last August, when Driven acquired International Car Wash Group.
Analyst Christopher Horvers, of JPMorgan, sees plenty of reasons to buy into Driven Brands’ stock, and in his note on the company he lays them out: “(1) DRVN benefitting from a reopening economy in 2021-22; (2) its large whitespace (and asset-light) unit growth opportunity; (3) the increasing benefits of scale against a fragmented competitive set; (4) the recurring/ maintenance-driven nature of demand; and (5) topline/margin upside potential.”
To this end, Horvers rates DRVN shares an Overweight (i.e. Buy), and sets a $39 price target, showing his confidence in ~20% upside for the next 12 months.
So, that’s JPMorgan's view, how does the rest of the Street see the next 12 months panning out for DRVN? Based on 5 Buys and 3 Holds, the analyst consensus rates the stock a Moderate Buy. Meanwhile, according to the $34.71 average price target, the Street expects shares to climb ~6% from current levels.
Last but not least is Poshmark, an online fashion and style site bringing peer-to-peer sales to the world of closets. The company operates on the social marketplace model, connecting more than 70 million registered users in the US and Canada, with more than 200 million items they have for sale. Poshmark allows users to list items by size and style, brand and category, and allows buyers to browse items online or to attend virtual shopping parties.
Poshmark launched in 2011, and has quickly moved into the same league as such established social sales apps as eBay and Etsy. The company paid out $2 billion in revenue to sellers during 2019. The company’s size and reach backed a strong IPO, held in mid-January, which saw the stock enter the markets at $42 per share, above the initial planned prices of $35 to $39. By the end of the first day, shares had hit $101.50.
Since then, however, POSH has slipped; the stock now trades at $70.26 and boasts a market cap of $5.14 billion.
Covering the stock for Raymond James, 5-star analyst Aaron Kessler noted: “Our positive fundamental view [on POSH] is based on: 1) a Large TAM that benefits from convergence of eCommerce, Social, and Resale themes; 2) Poshmark is a leader in social commerce with large and highly engaged user base; 3) our expectation of ~20% long-term growth, driven by continued growth of active users and existing cohorts, new product categories, international, and enterprise seller services; and 4) the company’s asset-light model, which should lead to 30-35% long-term EBITDA margins.”
Unsurprisingly, given the upbeat nature of his comments, Kessler rates POSH an Outperform (i.e. Buy). His price target, $83, implies room for 18% upside potential in the next 12 months.
All in all, Wall Street is almost evenly split between the bulls and those choosing to play it safe. POSH's Moderate Buy consensus rating is based on 5 Buys and 4 Holds. The 12-month average price target stands at $76.38 and suggests ~9% upside for the stock.