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There's been a drastic slowdown in IPO activity over the past couple of years, but it's looking like the number of 2017 IPOs will reflect a rebound in this market.
Only 128 IPOs were filed in 2016. That was the lowest amount since the financial crisis of 2009 when only 118 IPOs were priced.
And 2016 was the second straight year that the number of companies filing to go public fell from the year before.
There are a few reasons new issues have slipped – but that looks ready to change…
What's Dragged Down the IPO Market
A major reason for the recent decline in IPOs: economic and political uncertainty.
Most were unsure how last year's events like Brexit and the 2016 U.S. presidential election would play out, and those question marks caused nervous investors and volatile markets.
CEOs of private companies avoid selling shares in that kind of market. Companies can't raise as much money as they hoped to in their IPO if investors lack confidence in where markets and the economy are headed.
In 2016, there were the fewest IPOs since the financial crisis of 2008 and 2009.
It's not just global economic turmoil that has hit companies looking to raise money…
Money Morning Technical Trading Specialist D.R. Barton told me one of the reasons companies are staying private longer is because of the Sarbanes Oxley Act (known as SOX) of 2002.
In Section 402 of SOX, management and auditors are required to establish internal controls. Management and auditors must also establish reporting methods on the adequacy of these controls, which is very expensive to establish and maintain. This can discourage companies from going public.
Private companies, especially tech companies, are also having a difficult time raising money to grow their businesses before going public. According to Forbes, funding for Silicon Valley startups dropped 19.5% in Q1 of 2016 compared to Q1 of 2015.
Part of that reason is investors are taking losses on their investments in pre-IPO companies.
According to the Economist, Fidelity wrote down their investment in private companies like Zenefits (a software company) and MongoDB (a database program provider) by roughly 50% in Q2 2015.
However, given the answers to the following two questions, Barton expects 2017 to be a stronger year for IPOs than the past two…
What to Expect From the 2017 IPO Market
To evaluate if a year will be one in which companies are likely to hold IPOs, Barton starts with two key factors:
- Do investors feel wealthy?
- Is the tech sector in favor?
To answer the first question, Barton believes U.S. institutions and investors are feeling more optimistic now than last year. That's reflected in the Dow Jones Industrial Average closing in on 20,000, rising crude oil prices, and the strength of the U.S. dollar.
And the tech sector does appear to be in favor with investors right now.
SinceJan. 6, 2016, the U.S. information technology services sector – which includes companies like Alphabet Inc. (Nasdaq: GOOGL) and International Business Machines Corp. (NYSE: IBM) – has climbed 18.24%.
Why is that important?
Major tech stocks like Alphabet, Microsoft Corp. (Nasdaq: MSFT), and Amazon.com Inc. (Nasdaq: AMZN) have the largest market values on the S&P 500. When these companies' stocks go up, they drive the S&P higher.
A rising S&P 500 gives investors more confidence in all markets.Another good sign for the IPO market: Barton thinks the regulatory environment will be more accommodating to IPOs with Donald Trump as POTUS and a Republican-controlled Congress.
But just because there will be more IPOs, doesn't mean that every IPO is a good investment…
How to Evaluate if a 2017 IPO Is a Good Buy
With the IPO market potentially rebounding, there are currently 178 private companies with valuations exceeding $1 billion that could start to test the market.
And those billion dollar valuations sound impressive.
Barton said companies with valuations that high – known as unicorns – used to be rare.
But don't be fooled by a big number…
These valuations are based on more than just fundamentals. Part of the valuation is based on the revenue projections and the new products these companies could offer.
And there's no guarantee these companies will ever hit these revenue projections or that their products will be as groundbreaking as people expect. Companies that appear healthy, with billion-dollar valuations, could still be growing and could lose money right before a public offering.
So while these evaluations sound impressive, Barton says he evaluates IPOs just like any other company. He looks for strong and sustained sales growth. Most importantly, he looks for strong and sustained growth in cash flow from operations. He said that number is a much better indicator of profits, and it's much tougher to manipulate.
There are already several companies that have started the paperwork for a 2017 IPO filing.
It's still not a guarantee any of these companies will go public. But if they do, these will be the ten biggest IPOs of 2017.
Here's everything you need to know before making an investment in these companies…
2017 IPOs to Watch, No. 10: Lyft
Lyft is one of the largest ride-hailing services in the United States. It was founded in 2012 by John Zimmer and Logan Green.
Lyft users request a ride on the Lyft app on their smartphone. A driver will accept their ride, and the passenger's debit card or Paypal Holdings (Nasdaq: PYPL) account is charged.
If drivers applied to work before January 2016, Lyft takes a 20% commission from each ride. For drivers who applied after January 2016, Lyft takes a 25% commission.
According to a leaked document obtained by Recode, Lyft attracted the most new passengers and drivers in the ride-sharing market in a single month in July 2016. It also had 13.9 million rides in July, which was a 12% increase from June 2016.
Lyft is expected to generate between $400 million and $500 million in revenue for 2016. The ride-hailing app has a lofty valuation of $5.5 billion. That valuation is impressive considering Lyft launched in 2012. But Lyft will need to go public sooner rather than later if the company wants to grow.
Even though Lyft is a leader in the ride-sharing market, it still is significantly behind Uber in terms of rides and revenue. According to Fortune, there were 62 million U.S. trips on Uber in July 2016. In comparison, Lyft only had 13.9 million.
Lyft also needs more money to fund research for self-driving cars. In February 2015, Uber set up a research facility in Pittsburgh for self-driving vehicles. Tesla Motors Inc. (Nasdaq: TSLA) CEO Elon Musk plans to turn Tesla cars into self-driving taxis and even operate his own fleet of cars.
The next 2017 IPO to watch on our list is a company with a fresh take on meal deliveries…
2017 IPOs to Watch, No. 9: Blue Apron
According to Bloomberg, meal delivery service Blue Apron was interviewing banks at the end of September 2016 for an IPO filing.
Blue Apron offers a subscription service, where customers receive recipes and ingredients to make a meal. A two-person plan includes 3 pre-portioned ingredients and instructions for $59.94 a week. A family plan, which can include two or four pre-portioned ingredients and instructions, costs between $69.92 and $139.84 per week.
Through a different subscription, Blue Apron also sells wine. It's exact amount of customers is unknown, but CEO Matt Salzberg told Business Insider in 2015 it has "hundreds of thousands."
Blue Apron is projected to surpass $1 billion in revenue between October 2016 to October 2017, according to Recode. The company is also reportedly profitable on an EBITDA basis (earnings before tax, interest, depreciation, and amortization).
So far, Blue Apron has raised nearly $200 million in venture capital.
After forming in 2012, the future revenue totals look impressive. When Blue Apron does go public, it could have a valuation between $2 billion and $3 billion.
But even though this is a relatively new concept, the subscription food service is competitive…
Blue Apron's biggest competitor is HelloFresh. Founded in 2011, HelloFresh has over 800,000 regular subscribers across the world. It delivers food to customers in the U.S., U.K., Canada, Australia, Switzerland, Austria, and Belgium.
HelloFresh also has a more subscription options than Blue Apron.
Before buying Blue Apron stock, investors will want to review the detailed business information Blue Apron has to disclose before going public.
The most important detail will be how long customers keep their subscriptions. According to Recode, one of the reasons customers cancel the service is the food takes too long to prepare. The other reason is they are too busy to cook.
Reviewing subscription lengths and turnover rates will help us decide whether food subscription deliveries like Blue Apron are a fad or a sustainable and growing business model.
The next 2017 IPOs we are watching is a popular music service…
2017 IPOs to Watch, No. 8: Spotify
Spotify is a music streaming service developed in Sweden in 2006. It provides music, video services, and podcasts from record labels and media companies.
Spotify launched in Europe in 2008, but it had difficulty entering the U.S. market. Record labels did not like Spotify's free services, according to Billboard.com.
But after Sean Parker (co-founder of Napster) found out about the company, he invested $15 million in 2010 and helped negotiate deals on Spotify's behalf. Spotify was able to launch in the U.S. in July 2011.
Spotify has a free option with limited user choices, or users can pay for Spotify's premium service with more features like:
- Unlimited skips
- Offline listening
- No ads
- Better sound quality
The music streaming service makes money by selling ad space to third parties between songs. Spotify increased ad revenue from $107 million in 2014 to $213 million in 2015.
From its ad revenue and subscription services, Spotify reportedly generated a total of $2.18 billion in revenue in 2015.
However, the company is far from profitable…
In the accompanying chart, you can see that Spotify has reported negative income every year from 2009 to 2015.
As of August 2016, Spotify was paying a royalty of 55% to artists and record labels. But the problem is Spotify doesn't believe it will be profitable until rates are lowered to 49%.
That will be difficult to accomplish, as record labels want Spotify to increase its payouts to 58%.
Our next 2017 IPO to watch is popular social media site…
2017 IPOs to Watch, No. 7: Pinterest
In 2010, photo sharing website Pinterest was launched by founders Ben Silbermann, Paul Sciarra, and Evan Sharp.
Users create a "Pinboard" where they share photos and other media content they find on Pinterest. They can also share content they've found outside of Pinterest. Pinboards are generally organized by themes such as food recipes and fashion.
With 110 million monthly active users (MAUs), Pinterest is much smaller than other social media sites, according to Fortune. Facebook Inc. (Nasdaq: FB) boasts 1.79 billion MAUs and Twitter Inc. (NYSE: TWTR) has 317 million.
The social media site's biggest challenge with growing its audience will be attracting male users. According to comScore, 71% of Pinterest's users were female as of December 2014.
However, Pinterest's rapid revenue growth is what has investors interested in a Pinterest IPO…
In 2014, Pinterest's revenue was roughly $20 million. It grew five times that amount in 2015 to $100 million. And for 2016, Pinterest expects to generate $300 million in revenue.
Pinterest CEO Ben Silbermann was coy in an interview with Business Insider in April 2016. When asked about Pinterest's IPO plans, Silbermann said Pinterest is focusing on building a sustainable revenue model.
Pinterest may wait to see how other social media and tech IPOs fare in 2017 before going public.
There have been rumors since 2014 this next company would go public, but it could be closer than ever to going public in 2017…
2017 IPOs to Watch, No. 6: Chobani
Chobani is a Greek-yogurt maker founded in 2005 by Hamdi Ulukaya.
The company is looking to expand into the Mexican market and is offering new products, so Chobani will need more money to keep growing.
That means we could see a Chobani IPO in 2017.
The yogurt company hired Goldman Sachs Group Inc. (NYSE: GS) in 2015 to help it find a strategic partner to invest in the company. Chobani was open to the idea of selling a minority stake in its business, and PepsiCo Inc. (NYSE: PEP) wanted to invest.
While Pepsi is known for its sodas and snacks, it has also been expanding its health food line over the years. Chobani reportedly has annual sales over $1 billion, and an investment would give Pepsi access to the booming yogurt market.
But according to Bloomberg, Pepsi wanted a controlling stake in Chobani. In February 2016, Chobani rejected an undisclosed Pepsi offer.
Without securing money from Pepsi, the odds have increased the company will need to go public to grow its business. When Chobani hired new CFO Mick Beekhuizen in April 2016, he said "everything is on the table" in terms of financial deals and a potential IPO, according to The Wall Street Journal.
Sales of yogurt in the U.S. have skyrocketed over the last several years. In 2010, U.S. yogurt sales reached $6.2 billion. By 2015, they climbed to $7.7 billion.
That's an increase of 24% in five years.
But Greek yogurt accounts for less than half of all U.S. yogurt sales. And the yogurt space as a whole is very competitive, with Yoplait owning 26.5% of the U.S. market. In comparison, Chobani owns roughly 20%.
The next IPO we're watching is a tech company involved with file sharing and storing files on the cloud…
2017 IPOs to Watch, No. 5: Dropbox Inc.
According to Bloomberg, file-storage company Dropbox Inc. met with advisers in August 2016 to discuss going public in 2017. The meeting reportedly focused on the valuation the company could receive before going public.
As of March 2016, Dropbox had 500 million registered users and 200,000 businesses paying for its products.
Dropbox is mostly known for its file sharing and syncing programs, but it's expanding into cloud-based collaboration offerings.
Dropbox's cloud computing allows users to store data in the cloud and access it from any place with an Internet connection.
The company is not yet profitable, which makes it risky to own. Also, Dropbox's rival Box Inc. (NYSE: BOX) went public in January 2015, and the BOX stock price has been volatile. BOX stock opened at $20.20 per share on Jan. 23, 2015, but opened this morning at $14.41 per share.
That's a 28% drop in roughly two years.
But investors who want a good long-term growth opportunity shouldn't buy Dropbox stock if it goes public just because it could be a takeover target. Dropbox should only be in your portfolio if you believe it's a strong investment on its own merit.
The next company on our 2017 IPOs watch list has a creative solution for renting space…
2017 IPOs to Watch, No. 4: WeWork
WeWork provides shared workspace for freelances, entrepreneurs, startups and small businesses looking to save on costs. This shared space also inspires networking between new small businesses.
Its members have access to workshops, social events, internal social networks, and even health insurance. WeWork has over 30,000 members and 54 co-working locations in the U.S., Europe, and Israel as of December 2015.
As of July 2016, WeWork had a valuation of $16 billion. WeWork CEO Adam Neumann said at a conference in Aspen, Colo. that same month he was not afraid of going public.
WeWork expanded its business model in 2016 by offering "WeLive." The new program uses the same principles for WeWork but for housing. It offers rental apartments with shared spaces and services.
The company reportedly believes WeLive will account for 21% of its revenue by 2018.
But the bubbles and bursts of the housing and rental market could make WeLive's revenue volatile. In particular, WeWork's second-largest market is in London, where the long-term impact of Brexit on jobs and housing are unknown.
WeWork canceled a leasing space in London's financial district in July. This is a situation that bears watching ahead of a potential 2017 IPO…
2017 IPOs to Watch, No. 3: Invitation Homes
Invitation Homes is a unit of Blackstone Group LP that could go public as early as Q1 2017.
Invitation Homes manages single-family homes and would go public as a real estate investment trust (REIT). The company oversees 50,000 homes that U.S. Blackstone built in the aftermath of the real estate bubble between 2008 and 2009.
Invitation Homes leases single-family homes, which was a bet there would rising demand for renting over homeownership after the last housing bubble. It appears the bet is paying off, as homeownership is at its lowest level in 50 years and rent prices are soaring.
According to its website, Invitation Homes are located across 14 of the country's most popular metro areas.
The company plans to sell $1.5 billion worth of stock. It will use the money to pay down debt, according to WSJ.
Real estate investment trust stocks have performed well in 2016. The Colony Starwood Homes (NYSE: SFR) stock price is up over 37% in the last 12 months. The American Homes 4 Rent (NYSE: AMH) stock price has climbed 27.78% in the last 12 months.
The demand for renting single-family homes could continue to grow, as the Federal Reserve is expected to raise interest rates. Higher interest rates make it more difficult to obtain loans, which means fewer people can afford to buy homes.
But, if President-elect Donald Trump is able to create more jobs, U.S. workers would have more money to purchase homes.
Invitation Homes is in what appears to be a strengthening market, but investors should know the housing and rental market is notoriously risky.
The next IPO on our list has inundated you with commercials over the last year…
2017 IPOs to Watch, No. 2: Uber
In 2009, current CEO Travis Kalanick and Garret Camp founded Uber. It was originally called UberCab.
Even though Uber provides transportation services, it doesn't consider itself a transportation company. It doesn't own any vehicles, so Uber considers itself a technology company.
Users download the Uber app on their smart phone, and then request a ride. A nearby driver can decide if they want to give the person a ride.
Must Read: Your Uber Stock and IPO guide
As of January 2016, Uber had a whopping valuation of $66 billion. That's because its revenue is expected to skyrocket…
In 2014, Uber generated $459.3 million in revenue. In Q2 2016 alone, Uber's revenue hit $1.1 billion – a 122% increase from its full-year figure in 2014.
Part of the reason Uber has grown revenue so rapidly is more businesspeople using the service. In Q1 2014, only 9% of this group used Uber. That grew to 29% by Q1 2015.
Kalanick said in June 2016 the Uber IPO would happen in one to 10 years.
But Uber may need to go public sooner than later because of increased competition…
In July, Tesla Motors Inc. (Nasdaq: TSLA) CEO Elon Musk said on Twitter he wanted to turn Tesla vehicles into self-driving taxis.
Musk said when Tesla cars weren't in use, they could drive around and pick up ride seekers. That would earn Tesla owners money and offset monthly payments for new vehicles.
Musk also said Tesla could operate its own fleet of self-driving cars in the future. This places pressure on Uber to spend more money to compete with Musk.
But if Uber doesn't go public, this next company could be the biggest IPO of 2017…
2017 IPOs to Watch, No. 1: Snapchat
According to WSJ, Snapchat's parent company (Snap Inc.) could go public as soon as March 2017.
Snapchat is a popular social media app among teenagers and millennials. It allows users to add captions, drawings, and doodles to pictures and videos. And unlike popular social media sites like Facebook and Twitter, Snapchat messages disappear after the user has viewed them.
Snapchat users are very engaged with the app, spending as much as 10 minutes per day on it. In comparison, Instagram users use the app for 6.4 minutes per day.
And this engaged audience will allow Snapchat to make a lot of money from ad revenue…
Snapchat only generated $3.1 million in revenue for 2014. But by 2018, Bloomberg projects Snapchat will generate $1.76 billion in revenue.
That's a 56,674% increase in just four years.
But the social media market is very competitive, and that could impact Snapchat's revenue totals. Facebook offered Snapchat $3 billion for the company in 2013, according to WSJ.
The offer was rejected, but didn't mean Facebook was finished with Snapchat.
Since Facebook couldn't own Snapchat, it has started to implement popular Snapchat features on Facebook and Instagram. And because Facebook has 1.18 daily active users (DAUs) and Snapchat only has an estimated 150 million, it's a more appealing platform for advertisers.
If you understand the risks of Snapchat, Money Morning Director of Tech & Venture Capital Research Michael A. Robinson has a way to play the Snapchat IPO.
[Editor's Note: Before investing in Snapchat, make sure to read this complete guide.]
"I generally tell retail investors to avoid buying an IPO at the open because the insiders have already made all the money available at the debut," Robinson told me.
"My exception to this rule is to put in a limit order that is fairly tight from the offering price. Otherwise the risk is you buy at the top and then go upside down. That's a big risk to carry with a new issue that hasn't hit the lock up date," Robinson said.
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