Last week was filled with more out-sized IPO gains from BigCommerce (BIGC), Oak Street Health (OSH), Acutus Medical (AFIB) and to a lesser extent Rocket Companies (RKT).
For us Rocket was the real winner in our portfolio since it was priced low and opened quietly. It’s a rare chance to buy a substantial position without having to pay a huge premium. When names open at 2x or even 3x their IPO price the risk/reward for the aftermarket buyer isn’t very good. Fortunately for us RKT was available to buy in size below the initial $20-22 range. It closed the week at a more reasonable $24.90. The pricing weakness behind the RKT deal seemed to turn on whether the company is really “tech” or a “mortgage company.” Of course the answer is both which makes it trickier to determine what multiple to put on it.
There were some losers. Most notably Rackspace (RXT) which priced at the bottom of the range at $21 and promptly traded down to end the week at $15.40. Rackspace has pivoted from being a public cloud infrastructure provider (like Amazon AWS, Google Cloud and Microsoft Azure) to a “partner” that provides a level of managed services that combine public and public cloud offerings into full solutions. This takes them out of one competitive area and puts them in another with behemoths like Accenture (ACN), Cognizant (CTSH), and Infosys (INFY).
The “sleeper” deal we identified last week never really woke up – at least not yet. IBEX (IBEX) priced their deal below the range at $19 and is now trading at $15.60. Although they are transitioning to a more attractive business (business process outsourcing or BPO) the majority of their current business is still call centers. I don’t think that’s so terrible but investors are not willing to give them credit for it. Growth is slow too but it’s now at 1x current revenues. Compare that to LivePerson (LPSN) which just rocketed to 11x sales on a strong quarter. Both companies have similar levels of revenue. I hope the IBEX management team is taking notes!
Deals this Week
The big deal of the week is KE Holdings (BEKE) which is a large housing platform in China. It’s a $2B deal with a $20B market cap on $7.7B of LTM revenues. Even more impressive is that the company comes into the IPO with over $3.5B in cash on the balance sheet. They turned profitable during the first six months of 2020. Their two main operations include a residential real estate brokerage (Lianjia) and an online/offline platform for real estate transactions and services. Maybe instead of a Zillow (Z) it’s more of a combination of Realogy (RLGY) and Rocket Mortgage (RKT). In any case this is a clear way to play the growth of wealth and household formation in China. The current range is $17-19 with Goldman and Morgan Stanley leading.
I had to put my glasses on to be sure I was reading this one right. NetSTREIT (NTST) is a retail REIT! This in a world where nobody goes shopping except online. That’s not true of course and NTST focuses on they types of tenants that can’t be displaced by e-commerce or avoided in a pandemic. Think convenience stores, gas stations, drug stores, that kind of thing. Kind of a mixed bag in terms of bankers but with yields as low as they are this one should work. The current range is $19-21 with Wells Fargo leading. That range puts the deal size at ~$300M for an EV of ~$430M.
There’s already a lot of excitement around Duck Creek Tech (DCT) which provides SaaS for P&C insurers. This is a “deep enterprise” kind of software name because core systems for insurance companies don’t change often and the sale cycle is long and complicated. So growth here isn’t rapid but they company has LTM revenues of $200M. The shares are offered at a rich valuation (12x sales) in the current $19-21 range. No doubt they have been influenced somewhat by the huge success that Lemonade (LMND) had in early July. Lemonade is trading at 37x trailing revenue but is growing over 100% YoY and is a pure consumer play. Duck Creek is a very different story. We like the space though. One of our favorites (and in the model portfolio) is Goosehead Insurance (GSHD) which has been a huge winner. Goosehead provides a sanity check at least at 19x sales. The deal size is $300M with a proposed market value of ~$2.6B. Goldman and JP Morgan have the books.
CureVac (CVAC) is another mRNA-focused biotech. Our readers may recall our work on Moderna (MRNA) which was the first IPO we covered in this mRNA space. (Bill Gates has recently indicated how promising he thinks these mRNA-based approaches are.) Their two lead drugs are only entering Phase 1 trials. One is for solid tumors and the other is for rabies. Of course they also have a COVID-19 vaccine candidate which they are doing a Phase 1 trail for with results expected late this year. It’s hard to keep a count of how many companies have vaccine candidates already.
Finally we have another SPAC pricing this week – FS Development (FSDC) is one targeting a business in healthcare.