Hargreaves Lansdown has identified five companies to look out for in regards to potential IPOs in 2021.
The companies highlighted are Deliveroo, Instacart, Bumble, Nextdoor and Darktrace.
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, comments: “2021 is likely to herald in a fresh rush of IPOs with prospectuses full of promise. News of initial public offerings always provoke a flurry of interest with investors keen to get in on the action from the beginning.
“The number of companies planning an initial public offering is usually boosted at a time of booming consumer confidence and a buoyant economy. Yet, we’re still in the middle of a global pandemic, we’re grappling with the repercussions of a deep recession and hopes are fading fast of a sustained rebound in global growth.
“However, on both sides of the Atlantic, IPOs have been coming thick and fast. The soaring value of tech stocks has been leading sentiment, helped by a huge doses of central bank stimulus and also the waves of optimism that have washed through the financial markets thanks to vaccine rolls outs.”
The biggest fanfare was reserved for AirBnB when it launched late last year and was hugely oversubscribed at $68 a share. It saw its shares surge by 116%, giving it a valuation of more than £100 billion.
Information on the potential IPOs
Delivery companies have come into their own during the pandemic as people have had little option but to switch to dining in at home instead of eating out. Deliveroo, a takeaway delivery business based in the UK has been benefiting from the takeaway trend with rising revenues and rumour has it that the time is being judged to be ripe to go public. Although the company is still loss making it did get an investment boost from Amazon which now owns a portion of the company. Appetite for a slice of the delivery sector is high, just look at the incredibly successful Door Dash IPO in the US which saw shares rise 86% above their initial public offering price.
However, competition in the sector is fierce, and Deliveroo competes with Uber Eats, Just Eat and a host of others. Profitability can be tough as well as margins tend to be slim thanks to competition and high variable costs. But the potential is there for strong returns if the logistics can be performed well and a company can establish itself as a fixture of the industry.
There is of course a risk that demand for home deliveries will wane once the pandemic has eased. It’s likely that the public will be desperate to eat out as soon as they can, ditching their a knock on the door and a bag of food for a real restaurant experience. The group could target a valuation of £3.2bn.
Instacart is another delivery upstart benefiting from the surge in home orders. Based in the US it mainly delivers groceries but has branched out to other products. It has a similar app business model to rivals Uber Eats and Deliveroo which also offer some groceries on demand. The courier is branded as a personal shopper who selects groceries and then drives to your door. The pandemic is likely to have given Instacart a significant boost but there are some concerns over long term profitability.
However, just like other tech companies, the price is likely to be high, and while the group may have shopping bags of potential, there will need to be a clear path to profitability laid out, if it’s not there yet. The group was recently valued at $17bn and is rumoured to be targeting a $30bn valuation.
Bumble is another company swirling around the IPO rumour mill with speculation it could go public as soon as February. The dating app uses a similar model to Tinder but has a twist. It claims it empowers women because when it comes to matches between opposite sexes, they have to make the first move to get the conversation going. It boasts of 100 million users and has expanded its service to link up new friends as well. Running an app is a potentially attractive business model, because each new member doesn’t cost a lot to service.
Bumble has not yet released a prospectus, but Match Group, which owns competitor Tinder, is publicly listed. The group generates over 30% operating margins and grew revenue 18% in the third quarter this year. If Bumble can boast of similar numbers it’s likely the company will be in demand and the group is rumoured to be targeting a valuation of more than $6bn.
It may be full of nosy neighbours and nimbys but Nextdoor, a hyper-localised social network, has been boosted during the Covid crisis. Neighbours have increasingly relied on each other via the app for support, and to share goods and services. The company makes money by offering a locally targeted advertising service. Like all social media companies, user growth is vital, so it’s impressive that the company has already reportedly reached one in four neighbourhoods in the US.
Facebook is also apparently planning to muscle in, so competition could be a challenge, but this could also suggest Nextdoor is on to a good thing. If Nextdoor can carve out a niche it could generate significant profits for investors – although that’s far from guaranteed. The group is reportedly targeting a valuation of $4-5bn.
The cyber-security firm with an ominous name is another potential candidate hoping for a bright future as a publically listed company. Darktrace has developed an artificial intelligence approach to stopping cybercrime, and offers software and systems to protect businesses and their customers from attack. The marketing is certainly very slick, and the products are likely to have been in high demand as around businesses around the world were forced to move to home working. The group is rumoured to be targeting a valuation of £3.8bn.
Of course taking part in an IPO and investing in individual companies might not be right for everyone. It is a higher risk as your investment is dependent on the future of that company and if it fails you risk losing your money. It’s important that investors understand the companies they are investing in, go through prospectuses with a fine toothcomb and make sure any businesses they own are held as part of a diversified portfolio.