The Update Issue: The IPO-Palooza Continues, A Quibi Postmortem

By Berna Barshay

Friday, January 8, 2021

► Several long-anticipated initial public offerings (‘IPOs’) are scheduled to make their debuts next week…

The filings really started flooding in right after the New Year, setting up next week to be a busy one for equity capital markets desks across Wall Street.

After delaying its IPO from the fourth quarter, “buy now/pay later” company Affirm (AFRM) seeks to raise just under $1 billion and is set to start trading next Wednesday. The $33 to $38 range set for the shares implies a valuation of around $11 billion for the fintech company, which enables e-commerce shoppers to finance their purchases over several months instead of paying all at once.

For shoppers with good credit ratings, Affirm allows them to stretch out their payments while avoiding the high interest rates incurred with most credit cards… Affirm interest rates can range from 0% to 30%.

The shift to e-commerce during the pandemic – and also the propensity to purchase larger ticket items for the home like furniture, appliances, and exercise equipment – has boosted Affirm’s business, and its valuation, which stood at nearly $3 billion, when it last raised capital in the private markets in April 2019.

PayPal (PYPL) co-founder Max Levchin founded Affirm in 2012. Levchin made a bet lightning could strike twice in the fintech space, unlike his co-founders who went on to amass fortunes founding companies in other tech areas, such Elon Musk at electric-car maker Tesla (TSLA), Peter Thiel at software company Palantir Technologies (PLTR), and Reid Hoffman at business networking website LinkedIn, now owned by Microsoft (MSFT).

The extraordinary Silicon Valley success of the PayPal founders’ group has earned them the nickname the “PayPal mafia.”

Affirm’s largest partner is one of my favorite stocks from 2020, home-exercise company Peloton (PTON)

Many buyers choose Affirm to finance their bikes and treadmills, which can run into the thousands of dollars. Peloton accounted for 30% of revenues at Affirm in the third quarter – which is extreme business concentration with one customer – although beyond Peloton, Affirm is much more diversified, with the next nine largest merchants collectively making up only 7% of Affirm’s revenue.

Affirm is offered at 6,500 merchants… you might have seen it if you bought a mattress online or looked at second-hand designer handbags… online luxury resale site The RealReal (REAL) was in fact the first place I remember ever seeing Affirm offered as a payment option.

I’m intrigued by the Affirm business model… credit cards are obviously a terrible way to finance anything. Even customers with great credit sometimes find their expenditures too lumped together all at once… but good credit doesn’t get you much of a break when financing a purchase using a credit card.

Earlier this year, when I was buying my Peloton bike, I used Affirm to finance it at a 0% interest rate. Later, when my spending had normalized a bit, I paid it off all at once, in a seamless process. Financing at 0% is clearly a no brainer, but even at a rate of a few percent, their offer to spread out payments would have been appealing.

Affirm revenues were up 100% in the third quarter, but the company is still loss-making (although making great strides toward reaching profitability).

I need to understand its path to profitability better and see how much shares pop when they begin trading before making a call here… the company operates in a great area (e-commerce), is putting up 100% growth, and offers something the market needs – more competitive financing rates and an excellent customer experience – so I will keep an eye on this one.

I’ve been eagerly awaiting another company that’s going public next week: person-to-person resale site Poshmark (POSH)…

As I wrote in October, I’m bullish on the long-term growth prospects for the resale e-commerce sector, and I think Poshmark’s person-to-person marketplace business model will ultimately be a lot more profitable than the centralized inventory model of competitor The RealReal, the first company in the space to go public.

Poshmark is set to start trading next Thursday, and is raising around $250 million, with shares indicated to price in the $35 to $39 range. In this range, Poshmark would be valued at almost $3 billion. Like Affirm, the expected valuation indicates that the company has approximately quadrupled in value since the last time it raised money in the private markets.

Founded in 2011, Poshmark has been putting up healthy growth, but nothing like the rates seen currently at Affirm. In the first nine months of 2020, Poshmark reported 28% revenue growth… healthy, but a far cry from 100% growth. But unlike Affirm, Poshmark has proven it can make money with its business model, as it turned profitable last year.

I plan to dig into the regulator filings on this one… I already did a quick review of the financials it filed last month and reviewed them in the December 18 Empire Financial Daily.

The IPO market was hot in 2020, and so far, 2021 looks to be more of the same…

Also on tap for next week are two gaming companies – Motorsport Gaming (MSGM) and Playtika (PLTK) – and car service center franchisor Driven Brands (DRVN), which owns Meineke, MAACO, CARSTAR, and several other branded chains for maintenance, repair, and carwash.

The most familiar name on the calendar for next week is Petco, which returns to the public markets after its leveraged buyout (“LBO”) in 2006. When it last traded publicly, its ticker was PETC, but this time around it gets the ticker symbol equivalent of a vanity plate: WOOF.

I owned Petco at times in its former life as a public company, and I am generally bullish on pet segment spending – it’s hard not to be when you have three dogs – so it’s another one I plan to take a look at.

Looking beyond next week, highly anticipated 2021 IPOs could include cryptocurrency exchange Coinbase, dating app Bumble, delivery and logistics giant Instacart, trading app Robinhood, social networking site Nextdoor, and non-dairy milk maker Oatly.

One of the most anticipated pending IPOs in the market just got a lot more expensive last week, though…

Video game company Roblox (RBLX), which is all the rage with teens and tweens – something I know all too well – became one of the most valuable private companies in the world this week when it raised money in the private markets at an eye-popping $30 billion valuation (up from a $4 billion valuation last February).

The pandemic drove children online and onto Roblox in unprecedented numbers… but even with that tailwind, that is an astounding jump in valuation in just 11 months.

My two favorite private companies coming into this IPO frenzy were Airbnb (ABNB) and Roblox. Airbnb ran away from me on the first day, more than doubling on the initial opening pop before I could even buy a share… and now it seems Roblox has run away from anything resembling a reasonable valuation before even scheduling its roadshow.

Companies going public later – when they are already larger – and at such lofty valuations, is making it harder to get outsized returns on IPOs. My advice on all of these companies that come public with ultimately stratospheric valuations is if you must own them because you are a true believer, just buy a third of a normal position to start, and wait to buy more on some hiccup… be it in three months or three years.

This trading strategy worked for me last year when Revolve (RVLV) shares got crushed early in the pandemic after a strong 2019 IPO, and it was a good strategy when Facebook (FB) had its debut in 2012 as well.

Quibi may be dead, but its content has found a second life on Roku (ROKU)…

The maker of streaming video players announced this morning that it would acquire most of the Quibi content library and put it up on its service for free. I’ve written about Quibi a few times, usually with a bit of schadenfreude…. and this time is no different.

Financial terms weren’t disclosed, but rumors are the price was less than $100 million. Quibi had raised $1.8 billion prior to its launch. Apparently, it didn’t spend all of it… but the internal rate of return (“IRR”) can’t be good here.

Ratatouille: The TikTok Musical was a critical and financial success…

Last week, I wrote about how a musical was crowd sourced on social media when a bunch of enthusiasts of the 2007 Pixar animated film Ratatouille came together on TikTok to compose, write, choreograph, and design a musical based on the movie. After going viral, it was produced into an online event, which raised more than $1 million for charity The Actors Fund… mostly one $5 ticket at a time.

While the New York Times was somewhat critical of the production, the Washington Post was kinder… and the reviewer at the Los Angeles Times offered an outright rave.

Given that only 20% to 30% of Broadway musicals ever turn a profit… the project, which came together with great speed building on the creativity and talent of amateurs, might offer some lessons. The New York Times commented at the end of its review…

So maybe the hive mind is on to something. Certainly it would be healthier for the theater if Broadway musicals could be built, like “Ratatouille,” in just a few months, by individuals, not conglomerates. Our current process, which takes years and more money than anyone but a corporate behemoth can muster, too often squashes idiosyncrasy and cuts off artists from their communities of inspiration.

In the mailbag, readers react to Wednesday’s essay on China and the recent escalation in economic tensions with that country…

Which IPO are you most anticipating in 2021? Have you ever hit it big with an IPO? Share your thoughts in an email to [email protected].

“It is said there’s an old Chinese curse that goes: ‘May you live in interesting times’. We certainly are there now! I wonder what will happen to my BABA shares if delisted?

“The thing most Americans do not want to admit or do not recognize is that China already controls the world, has plenty of money while we are about 30 trillion in debt, an amount we will never be able to repay while the Fed continues to create more fiat dollars at a record pace.

“Personally, I try not to buy anything made in China, an impossible task. Once went into a Macys store and asked if they had an all-cotton shirt made in the USA. They laughed at me! As 70% of our economy is consumerism, we, as consumers, have the ultimate power to change things BUT most people seem to want to save a buck or two and don’t care where things are made. I try to buy local whenever possible to support small business and try to avoid larger corporate stores to keep the money in my local community. Wish the rest of you would do the same.” – Michael W.

“Hi Berna, Happy New Year! I am in Hong Kong and our perspective is quite different, as we’re ‘on the ground’. These ‘disappearances’ are definitely a flaw of the People’s Republic of China, but I don’t think it should deter anyone from buying Chinese businesses. The laws and regulations in China are firm and strong, and one will lose out mightily over the long term because China is almost certainly going to supersede America in the near future, economically.

“A good alternative would be to invest in the Hong Kong stock market because you get Chinese businesses in a low-tax jurisdiction with a strong rule of law and much international confusion concerning the political situation. (The ‘draconian’ National Security Law is actually supported by most people after they have seen the terrible effects of the foreign-funded riots, and it has made Hong Kong much more peaceful, prosperous, and safe!)

“There is also not a big value investing cohort in Hong Kong, so I am sure one can find plenty of bargains – even cigar butts!” – Russel K.

“Hello Berna, In response to your latest email on Chinese equities: I’m a German that lives in both China and the U.S. As an investor, I’m also in both regions.

“It’s common knowledge here that if a company is getting too big in a sector that is important to the government, trouble is set to come.

“In China, everyone uses AliPay and WeChat Pay. In 4 years’ time, I have never even brought my wallet out. That’s how big these 2 apps are. Because AliPay has the payment data of hundreds of millions of people, it’s understandable that being a private company can lead to trouble. I’m not arguing whether right or wrong, it just makes sense.

“The same counts for any company that owns lots of sensitive data, or private companies that want to enter traditionally government-controlled sectors like gasoline/oil. It’s just how it works.

“But on how it’ll affect other US companies: for Starbucks (SBUX)/Nike (NKE) etc., this is not a big deal. those companies are a normal part of daily life here and enjoy stability. The same for Caterpillar (CAT) and such.

“The fear-making that these U.S. corporations are ‘in danger’ for their Chinese entities is mostly just baloney.

“Right now, I’m in China again as it’s safe during the pandemic. When you see what is going on daily here, and what you hear in foreign news, there is a really big difference. I’m very comfortable investing in Chinese equities. And I will likely stay comfortable investing in Chinese equities.

“What happened with the BABA story was quite predictable when you have an understanding of how things work here. When you prepare for that as an investor, it’s all fine :)” – Tobias V.


Berna Barshay
January 8, 2021

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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