In this episode of the Motley Fool Answers podcast, host Alison Southwick and analysts Matt Argersinger and Aaron Bush dive into several interesting, young, founder-led companies and reveal which ones they think could be great investment opportunities for your portfolio.
A full transcript follows the video.
This video was recorded on Oct. 1, 2018.
Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick and I’m… all alone. Well, Rick’s behind the glass, but Bro is off, so this week I’m sending you to our Member Event in Denver, where Matt Argersinger and Aaron Bush spoke to a group of investors about investing in IPOs and some IPOs to watch. All that — and, well, only that — on this week’s episode of Motley Fool Answers.
Southwick: 2018 is shaping up to be the biggest year for IPOs in nearly two decades, which means there are even more opportunities to invest in the next big thing. Let’s head out to our Member Event in Denver, where Matt Argersinger and Aaron Bush spoke in front of a bunch of Fools about some of the more recent IPOs they are excited about along with our general advice on how to invest in a company that has recently gone public.
Matt Argersinger: The market cycle, the economic cycle, can have a tremendous influence on IPOs. We saw the tremendous number of IPOs, the record IPOs in 1999 and a really good year in 2000 as well, but then look at 2001 to 2003. Really fell off the map.
Given the market volatility, given the mild recession we had, companies were just really hesitant to go public. All of a sudden there was much more scrutiny on companies’ financials. Investors started to look at more profits rather than great stories and priced eyeballs and other crazy, wonky evaluations that came about during the late ’90s and early 2000s. It kind of fell off.
As the economy improved from 2004 through 2007, it became another decent time for IPOs. Again, here we go, the 2008-2009 financial crash. A bad economic cycle. IPOs fell off the map. Now we’ve been in this weird period since 2010 where IPOs have come back, but as you can tell other than maybe 2014, it’s been a relatively mild time for new public companies. Certainly, the last couple of years have been relatively poor.
This year it’s been a little bit of a sea change. There actually have been quite a number of IPOs. In fact, when I did this slide about a week ago, there had been 194 IPOs so far of at least $10 million. That already exceeds the 2017 total. So, here to date through roughly October 10th, we’re already vastly exceeding the number of IPOs we saw last year. In fact, and we’re on target this year for these companies to raise $75 billion, which actually would be the second most since 2000. In terms of this century, 2018 could be the largest year for IPO value since 2000.
What Aaron and I did — and we did a similar thing back in the summer — is we looked at companies that have come public this year. I think we did six. David Kretzmann was with us. This time we looked at six again, one of which is a repeat, but we have five brand new companies that recently came public that we’re looking at. Without further ado, let’s go to our first one, which is Bloom Energy (NYSE:BE).
Before I talk about that company, I’ll just ask Dan Boyd to play a five-minute video that goes into Bloom Energy, the CEO, and I think it will be a good job explaining what this company’s about.
KR Sridhar: My name is KR Sridhar, I’m the founder and CEO of Bloom Energy. The mission of Bloom Energy is to make sure that everybody on the planet has access to energy. When I was working the Mars missions when I was working for NASA, I was trying to figure out how to produce breathing air, water, heat, electricity, so one day, humans can live on Mars. It dawned on me, watching 50 million people coming out of poverty every single year on Earth, all these people want the same things that we all have. You have an immediate problem on planet Earth.
What Bloom does, it produces electricity on-site for customers in a reliable, affordable and sustainable manner. On the outside of the Bloom box, natural gas, the gas that comes into your home for cooking, for heating, same gas, goes in. And out comes electricity that comes into your main switch and gives you the electricity for the building. Inside of these Bloom boxes, you have these little wafers called fuel cells. One fuel cell like this can produce enough power for one light bulb by taking fuel on one side, air on the other side, and producing electricity with no flame, with no combustion. Very little pollution, very high efficiency, no in-between steps, great power. Stack them together and build a brick. This cube, 4 in x 4 in x 4 in, is enough to produce power for one average U.S. household 24/7, all day long, all year long. Now, put them together in a big farm, that can power a data center or a huge community. We are doing all that right now.
There are so many different definitions of entrepreneurship, but the favorite one that I’ve heard is, an entrepreneur is somebody who knows how to do more than anybody thinks is possible with less than anybody thinks is needed and faster than anybody thinks as possible.
What motivates me are big ideas. I wake up in the morning and I’m ready to go to work if and when I know that whatever I’m going to be doing is going to have a huge impact if I’m successful. My son, when he was nine years old, said, “Why not put Bloom Energy as the name?” And I asked him why Bloom? He said, “Because it’s not geeky-sounding, and most importantly, the reason you’re working so hard is you want economies to bloom. You want lives to bloom. You want the planet to be sustainable where flowers will bloom.”
I have no reason to believe why we cannot be the revolutionary change for electricity.
Argersinger: By the way, this video was from a few years ago. Obviously, Bloom Energy has gotten a lot bigger since then. And, of course, they just went public this summer. There’s a lot to love about this company. You got a hint from that. The founder, KR Sridhar, came up with this solution and they’ve had a lot of initial success, especially in primary areas like data centers, healthcare, micro grids. For some of the companies that were up there — Walmart, eBay — what they serve is really sustainable, very efficient backup systems for a lot of what they do. Having that kind of access to energy that’s off the grid — primarily it employs either natural gas or bio gas, very low amounts of natural gas and bio gas to create a lot of electricity. It makes it so that really, you have 24/7 sustainable but also backup energy in case something happens with the grid or there’s some kind of electrical shock.
A lot to like. I’ll point out one statistic I really like. The average Bloom box is 125X more space-efficient than solar. If you saw one of those boxes, the big ones that are outside, you would need essentially 125 big solar panels to create the amount of energy that’s coming from one Bloom box using a small amount of natural gas with very low emissions from that.
You can see some of the largest customers — AT&T, Equinix, which is one of the largest data center companies in the world, if not the largest, Home Depot, Southern Company is a big partner of theirs deploying Bloom boxes all over the country with their footprint.
An exciting IPO, and one that I’m excited to watch and see where it goes over the next several years.
We’ll go to the next one.
Bush: Let’s talk about Eventbrite (NYSE:EB). How many of you have used Eventbrite before? That’s what I thought. You all know what Eventbrite is. For those of you who don’t, think about events as a spectrum. On one side, you have, small family friend gatherings. You don’t really need a platform for that. So far, my mom hasn’t asked me to buy a ticket for Thanksgiving dinner yet. That’s one end of the spectrum. On the other end of the spectrum are the giant sporting events and concerts where the venues have big contracts with a ticketing company. But there’s a huge middle zone in between there for things like seminars, classes, wellness activities, fundraisers, all sorts of events that are in that perfect middle zone. That’s where Eventbrite focuses.
The platform is really interesting. It’s modular so that people who are making events can be flexible in how that works on their platform. It has features such as registration, ticket purchasing. It can tie in with all sorts of third parties like Facebook and HubSpot, Salesforce if you need. They’ve really taken the top dog status in this industry so far.
For some stats, just to understand how big this company has become in terms of its presence in events, over the last fiscal year, their platform served over 700,000 event creators for over three million events in over 170 countries. They issued 203 million tickets over the past year, which is a lot of tickets. Not all of those are paid tickets, but it’s still a lot of tickets.
Their economic model is pretty simple. They take a base fee and often a small percentage of the ticket price. As more people use Eventbrite, the more money Eventbrite makes. Those sound like really big numbers, and they are, but the opportunity is even bigger than that. They estimate that in their top 12 markets, there are about three billion tickets that they can go after. 200 million, three billion, that’s still a pretty substantial jump. And over one billion of those three billion tickets are paid. That’s where they would make their money.
I pointed out a couple of metrics that are really important here, just thinking about how their economics work. The first one is the growth in paid tickets because that’s where the money is. Over the past year, they’ve grown 59%. They’re growing super quickly. Then, they have a super high retention rate, too. This isn’t exactly a customer retention rate. This is closer to a dollar retention rate. But it’s really important that those who use Eventbrite, Eventbrite is able to keep them in their system. So far, so good. Those are the two metrics I would pay the most attention to going forward.
Eventbrite is the top dog, which we like to see, especially for Rule-Breaker-style companies. That’s the first trait of being a Rule Breaker, being the top dog and first mover in an important emerging industry. I’ll call out a couple of advantages they have. One is the brand. As we saw, pretty much everybody raised their hand for having used Eventbrite. If you think about it, if now you were to go and create your own event, there’s a good chance you’re going to use what you have seen as a consumer. That’s a huge advantage that plays in their favor. Also, ticketing is a pretty big industry. There are a lot of companies out there trying to get in different verticals, getting to different countries, different parts of the market. But Eventbrite has the potential to roll up a lot of those players. In fact, over the past couple of years or so, they’ve actually acquired seven ticketing companies. One of those is Ticketfly, which some of you might recognize. Pandora acquired Ticketfly for a pretty absurd amount of money and sold it to Eventbrite for about half the price they’d purchased it for. As an example, that gives them deeper footing in music. How they view rolling up and moving into other countries is smart, I think.
This company produces free cash flow when others are still struggling to grow into their certain domains. The founders are Julia and Kevin Hartz. It’s a couple. Not bad. Julia is the CEO. Kevin is the chairman. Fun fact: Kevin was also the founder of a past Stock Advisor recommendation, Xoom, which was later acquired by PayPal. I’m impressed what these founders have been able to do.
Argersinger: Aaron, you mentioned music and competing ticketing companies. I’m sure a lot of people sitting here probably own Live Nation, or at least follow Live Nation a little bit. If I’m thinking about Eventbrite, what are the key distinctions between Eventbrite’s business and Live Nation’s business?
Bush: As I was talking about, the spectrum, Eventbrite is right in the middle, so more middle-sized events. Live Nation is going to be going after blockbuster concerts. They have contracts with the venues that Eventbrite would never even touch. They’re serving completely different types of events. Eventbrite might go into some music more, but I don’t think they’ll clash too much.
Argersinger: Our third one is a company we actually talked about in our last one, and that’s DocuSign (NASDAQ:DOCU). I’m sure everyone in the room knows DocuSign and has probably used DocuSign. Raise your hand if you’ve used DocuSign in the last year. Yeah, pretty much everyone in the room. It has become, I think — well, it says it right there, the world’s No. 1 e-signature solution. Really, it’s a brand that all of us are becoming more familiar with. If we’re buying a house, buying a car, refinancing our house, entering into a contract, it’s really become a very ubiquitous platform. And a very successful platform.
Just came public back in April. I like the way the founders and the executives have framed the mission of DocuSign, which is transforming the foundational element of business. If you think about how agreements — legal agreements, exchanges, contracts — happen between corporations or individuals over decades, the amount of paperwork, the amount of third party involvement, the amount of record keeping, think about fax machines blowing up every day, the amount of paper out there that was needed to actually sign and have official agreements come into effect, DocuSign has totally revolutionized that whole process. It’s not only taken away all the paperwork that used to be required, but made it so much more efficient.
If you think about buying a house or putting an offer on a house, the number of pages of documents you’re going through. If you’ve used DocuSign, you know you can just fly through them — you shouldn’t, but you can — you can just fly through that if you want. You hit next, sign, initial. It takes maybe five minutes to initial 80 pages worth of documents. It’s incredible.
Tremendous brand awareness. As we know, we’ve used it, we know the name DocuSign. At this moment, they have 425,000 customers. When I say customer, it’s not just us. If they counted us, it’d be millions. We’re just users. Customers who use DocuSign to create official documents to get to parties to sign documents, and have that kind of capability, you’re talking anything from a single-person office, small business, maybe a real estate broker, up to of major investment banks, Fortune 500 companies that have used the DocuSign platform to execute contracts. It’s a big customer base, growing crazy. Through last quarter, 650 million cumulative transactions have been done using DocuSign. I believe that’s over the last 15 years since DocuSign has been around.
Their primary business is subscription. Their customers on various tiers are subscribing to use DocuSign. They pay to the extent they’re using the platform. That revenue was up 35% year over year. That’s certainly the number you probably want to watch, the key metric for DocuSign going forward.
The founder is Tom Gonser. He was a lot more involved with the business early on. He’s still on the board, though he’s since moved on. He’s gotten into the venture capital business himself. He’s no longer an executive at DocuSign. So, it doesn’t really have the close founder touch that it used to have. But I’m really impressed with the executive team. If you look at the CEO, whose name escapes me, he has a 98% approval rating on Glassdoor. The company professes to have a really nice, positive working culture where people feel challenged, respected and have fun working.
It is a recent Rule Breakers recommendation —
Bush: It is.
Argersinger: — as of a few months ago. That’s one that certainly has gone on the scorecard somewhere. Certainly check that out. This is one we’re all familiar with, you might want to follow a little more over the next several years.
Bush: Two numbers stand out to me on this slide. One is 425,000 customers. That’s huge. If you follow any other software company, they’re generally like a tenth of that. They might not make as much money off of each of these customers, but just the fact that they have that many is a huge testament to their brand. Impressive. The other number, the recent price. You could tell we put this together a couple of weeks ago, because the recent price is like $40. But that’s interesting!
Argersinger: There’s a big discount. It’s certainly been a volatile time for a lot of companies just like this. Get it at a cheaper price if you can.
Argersinger: Company No. 4.
Bush: Zuora (NYSE:ZUO). I know this is in one other Fool service. How many of you are Zuora shareholders? Cool, a good number. This is a cloud-based provider of subscription software.
They’re the software that powers other businesses, start-ups that want to create subscription businesses, or big legacy companies that want to shift their business model over to subscriptions. Appropriately, they sell their business on a subscription basis, too. If you think about it, this is a trend that is probably one of the most powerful technology trends that’s out there. As we enter a subscription economy, people are buying fewer things, but going more the subscription path for a wide variety of goods and services. So, they’re in a really good spot there.
They have two flagship products, Zuora Billing and Zuora RevPro. Zuora Billing was their main flagship product for many years. They acquired another company that let RevPro also be a flagship service. Billing automates a lot of things — when you think about subscriptions, a lot of those tasks that go into managing that. RevPro is a revenue recognition product, so it deals with compliance and things like that. This is interesting to me because most software companies have one flagship product. By having two, it gives them two ways to attract customers. Naturally, they attract more customers than they would have if they only had one. They’re doing a really good job so far. Those two flagship products are selling really well. They continue to launch other products around how to maximize customer lifetime value, and other various aspects of subscription, eliminating churn.
As I mentioned, they’re doing really well. They’re seeing pretty impressive growth that I think is sustainable because this trend is so sustainable. Over the past year, they’ve grown revenue 47%. That’s going to fall down because they made acquisitions and such. But it’s one of those companies, when Tom said he looks for companies that can keep double-digit growth rates for many, many years. Just because of the trend that this company is riding, and how ahead they are of other competitors, I feel like they have a good chance of being like that, too.
If you look at their top customers, over $100,000, they’ve seen 28% growth over the past year. But perhaps the statistic that’s more interesting than that, since their 2016 cohort, of those over $100,000 customers, they’ve only lost one. Pretty incredible customer retention rates, which says a lot about what they do. And, their dollar retention rate is pretty positive, 112%, which shows that once people get into the ecosystem, they continue to expand with their relationship with the Zuora, expanding into other revenue lines, or, often, a business will just use Zuora for one service that they’re trying out, then roll it up across the entire company.
The founder is Tien Tzuo. He was the chief strategy officer and chief marketing officer of Salesforce for a few years. He has a really impressive background. He owns about 7% of the company. Also, Marc Benioff, the founder and CEO of Salesforce, owns 3% of Zuora. That’s a pretty solid sign of admiration, if you ask me.
Argersinger: Nice. If I’m not mistaken, I think Zuora has become a recommendation in Motley Fool Pro. As all of you know, Jeff and his teams love to look at these companies where there’s lots of recurring revenue, very low capital costs. This fits perfectly into that strategy.
I think we’re going with the fifth company. This is another one where you guys are going to be pretty familiar with the brand, probably even used it at some point over the years — SurveyMonkey (NASDAQ:SVMK). The official corporate name is SVMK. They just went public less than a month ago. As it says, the world’s leading online survey brand. They call themselves a pioneer in people-powered data, which they say is the merging of big data and also personal interactive data. Data from human beings, not robots or social networks scrapers. People are actively inputting their data into SurveyMonkey surveys. That data is collected, stored, analyzed to the 13,000 degree. Therefore, SurveyMonkey enables businesses and their customers to make smarter decisions about products, maybe about hiring, recruiting, things like that. The nice thing about SurveyMonkey is, its software integrates seamlessly with Google applications, Microsoft, Salesforce, Slack. SurveyMonkey can sit right on top of those applications and platforms and work seamlessly with technologies, and people are interfacing with those tools.
They have 16 million active users in 190 countries. A pretty impressive number. Much less are paying, but they have 600,000 paying users. Again, that scales all the way from one person paying for a premium subscription to SurveyMonkey to Fortune 500 companies. Mentioning Fortune 500 companies, they have organizational-level agreements with 71 Fortune 500 companies, which means that those companies use SurveyMonkey’s platform for some pretty rigorous survey applications, either internally or externally with customers. Those are ongoing subscription-based transactions.
It’s a relatively small company. $13.75 recent price. I would say, as a lot of these IPOs, the IPO price was a lot higher. This is one where that’s come down quite a bit from its IPO price, with a market cap of less than $2 billion. The founder, Ryan Finley, is interestingly not the CEO or chairman. He’s the VP of design, which sometimes tends to happen with a lot of these companies. You have an entrepreneur who started the company, designed it, and said, “I love just being on the design end, on the operating end. I don’t want to be an executive or a manager.” So, that’s him. He is the second largest shareholder of SurveyMonkey. Does anyone know who the largest shareholder of SurveyMonkey is? It’s kind of an interesting story. Sheryl Sandberg. That’s right. It’s kind of a sad story. I’m not sure if she’s the chairman, but she sits on the board. She’s the largest shareholder of SurveyMonkey because her husband was Dave Goldberg, who was the CEO SurveyMonkey, and he owned an 8% position SurveyMonkey. He tragically died a few years ago from cardiac arrest. As his wife, she inherited his stake in SurveyMonkey. Just an interesting connection, although a bit tragic.
Bush: Naive question for you.
Argersinger: I think I know what it might be.
Bush: Why would I use SurveyMonkey if I could just use Google Forms?
Argersinger: Good question. It depends on stickiness of the platform, familiarity with the app, how much data I have as an organization or an individual in the SurveyMonkey system. Maybe I don’t want to move away from that. I’m not really a user of SurveyMonkey, but I have a sense that they’re probably a little more efficient and scalable when it comes to gathering data as opposed to Google Forms. I could be wrong.
The question I thought Aaron was going to ask was the fact that one of the reasons SurveyMonkey sold off recently, pretty sharply, is because there’s a company called Qualtrics. They just filed to go public. They are a competing survey application. Certainly less brand recognition, but a bigger company growing a little more than twice the rate that SurveyMonkey is growing. I don’t know a lot about Qualtrics.
Bush: They’re profitable.
Argersinger: And they’re profitable. A big deal. They’re likely to come public within the next 30 days. If you’re interested in SurveyMonkey, you might want to check out Qualtrics, too, just in case.
Final company, No. 6. Here we go, Aaron. Elastic (NYSE:ESTC).
Bush: Elastic. I’ve been really interested in looking into this company. Just looking at it as an interesting company, it probably intrigues me the most out of all of these. Elastic is an enterprise search company. If you think about search, you probably think of Google, just typing text into a text box, pressing Enter, and a bunch of links or information pops up for you. As it turns out, search is much more than just typing text into a text box. If you think about, you can search on apps, you can search on websites, you can search into enterprise data. There’s application performance monitoring, business analytics, security analytics, and search plays a role in all of those different things. So what they’re trying to solve in being an enterprise search company touches a lot of different factors that a lot of enterprises have to deal with.
If you’re still confused by what that means, let me just give a few examples for you. How many of you have taken an Uber on your trip here? A few. If you think about it, when you are taking an Uber, you are searching for a driver and the driver is searching for a rider. Elastic helps power that search. I won’t ask this one, but Tinder is another example. When you’re swiping, the algorithm that decides who you match with, part of that is powered by Elastic. Adobe.
Argersinger: I think you should totally ask, though. How many people have used Tinder in the last — whoa, OK!
Bush: Solid. [laughs]
Argersinger: I didn’t know what the right time frame was going be. Sorry, Aaron!
Bush: So, Adobe, Elastic helps power if you’re searching for the right photos or fonts or textures. Adobe uses Elastic. Sprint, in a bit of a different way. Elastic helps them log billions of events per day to track website performance and network outages. Search plays a role there. SoftBank uses Elastic to monitor thousands of its servers to make sure that everything is running smoothly and to alert those who work with the servers to help them catch any potential problems that rise up. Facebook, when you search on Facebook, Elastic plays a role. If you search on a ton of different online websites, and it suggests product to you based on what you’re looking at, there’s a good chance that Elastic is behind that, too. Search is permeating a lot of different things. Elastic is behind a lot of different things, a lot of those features, the functionality that is out there.
It’s really interesting. Similar to a MongoDB or a Twilio, Elastic took a similar approach. Shay Banon is the founder. I want to say it was 2010 that he created Elastic Search, and he open-sourced the technology. He grew a pretty strong developer community around it pretty quickly. As of now, there have been over 350 million downloads surrounding the Elastic Stack, which includes Elastic Search and all the different functionality that Elastic has, which is pretty striking. Right now, they have 5,500 customers. These are a lot of the big names that I mentioned to you.
As you can see, they’re growing incredibly quickly. Over the past year, they’ve grown their customers about 80%. Perhaps just as impressive, their net expansion rate is 140%, which means that Facebook takes them as a customer, the next year, they’re doing 40% more business with them. That across the board adds up really quickly. Of course, these numbers will go down, but the opportunity to scale this up is pretty tremendous.
Unfortunately, everybody who looks at Elastic seems to see that, too, so the valuation is pretty high. I’m sure this has fallen a decent amount, again, since we put these slides together. At this time, it was trading at about 25X sales, which is super steep. It’s probably around 20X right now. The company is unprofitable, so they have a lot of work to do. But what they’re doing with the technology and their ability to get these high-valued, big clients and to scale with them, I think it’s incredibly exciting. Shay Banon continues to own 12% of the company. He’s here to stay, I think.
Argersinger: Awesome. Thanks, Aaron! That brings us to Q&A. We have roughly 10 minutes, that’s perfect. A lot of questions, and of course, if you have questions, go ahead and use the app. I’ll do my best to try to take a quick look at them and see if we can answer them.
First question, a general question. Aaron, you can start, and I’ll answer as well. What IPO are you most excited about in the coming months or 2019?
Bush: That’s a good question. Maybe Lyft. Maybe. Uber is talking about targeting a $120 billion valuation. I mean, business is interesting. It’s cars right now, but they’re trying to create transportation-as-a-service for lots of other things, as well. Uber owns parts of other ride sharing companies in other countries when it cut deals over the past couple of years. But Lyft, I think their last valuation was around $15 billion. If you’re comparing the two, there might be more valuation upside in Lyft. I know lift has continued to take market share over the past year or two as a lot of drama has fallen onto Uber. Yeah, I’m really interested to see what those two companies look like once they file. Lyft seems, maybe, more interesting to me.
Argersinger: I have to say Airbnb for me. As an Airbnb host over the last bunch of years, I have a pretty intimate knowledge of how they work and just how much money they make. It’s obscene. Are there any Airbnb hosts in here who posted? A few. As an Airbnb host, you set a daily rental rate for your property, the unit or the house. Airbnb charges your guest anywhere from 8-12%. That’s what they take from the guests. That’s the biggest share. From you, they take a 3% transaction fee. In other words, Airbnb has both sides. Of course, it’s a beautiful business model. The network advantage they have is huge. It’s such high-margin profit. They’re essentially creating the network, the platform, and hosts and guests like me do 99% of the work. [laughs] And Airbnb takes an incredibly healthy cut of that. It’s a tremendous business.
The thing with Airbnb, and I’ve even seen it in my hometown of D.C., is, of course, a lot of cities, municipalities are clamping down on some of the abuses, some of the hosts that have gone a little overboard with the number of rental units they have. It’s lost a little bit of the personal factor, the sharing economy that Airbnb was spirited toward. That has an opportunity to really shrink the potential market opportunity for the business. But I still think it’s an incredibly successful company, and I’m very excited to see them go public.
Bush: Here’s a good question for both of us. Of the six IPOs presented, which to would you invest in now? Do you want to take one, I could take one?
Argersinger: Yeah, let’s do that. I’ll just say, the one I’ve already invested in is DocuSign. I love the platform, the network effects, the brand recognition of the business, the recurring revenue, very low capital cost of the business. It’s not without competition. Again, whether or not it remains the leading e-signature solution is very much up to question. But it is the one that I’ve really glommed onto.
Bush: I’ll just add to DocuSign. I’m starting to look at it pretty seriously as a potential Crypto Society recommendation. We’ll see it. It’s interesting what they’re doing. If you think about just the idea of signatures and identity, that lends itself pretty well to crypto. DocuSign has rolled out a blockchain solution internally, which hasn’t gained much traction. They also recently rolled out, in the past quarter, the ability for signatures in these documents to be minted securely to the Ethereum blockchain, which is a pretty fascinating solution. If you’re playing this industry for 10 years or so, it makes a lot of sense that a lot of house signatures and contracts work will shift over to smart contracts and crypto. It’s good to see them ahead of the game there. Who knows when that’ll really shape up, but, fun fact.
The company I would probably go with right now is Zuora. The tailwind just seems super obvious to me. The subscription economy is not going away anytime soon. It’s probably going to be picking up for many more years. Zuora is a leading contender to continue to get like the biggest and best companies, as well as the start-ups. There really are both of those angles to it. For new companies coming up, Zuora is building the brand. This is where those subscription companies will turn to first. And for companies that are looking to pivot and modernize their business models, Zuora will also be who they turn to first. Plus, the numbers are good. I’ve been really impressed with their ability to scale their products. So, I’m really interested in Zuora.
Argersinger: This is a more general question. I like it. When is the best time to invest in an IPO? We can both take a crack at that.
Bush: I would say, biggest-picture-wise, probably after the first year or so. Statistically, as a whole group, IPOs tend to underperform in the first year because there’s so much hype when they come out, and then it tends to fizzle away a little bit. On average, that makes more sense. It also gives investors a good opportunity to see quarterly performance. You can see if these companies will perform as well as they say they will in their prospectus. There are so many great companies and great examples of that. You could tell from the very beginning just based on their growth, based on their profitability right out of the gate, Google for example, or MasterCard, that day one was a pretty great time to be buying.
Argersinger: Yeah, I agree with Aaron on the first point he made, which is waiting a year. If I remember correctly, I think David Gardner at some point has come out and said he likes to see how an IPO does over the first 12 months. Looking back over its first year, did it outperform the market? That can be an interesting clue as to how the company’s executing and how the market feels about the company.
Unfortunately, I’ve broken that rule twice this year. I bought iQiyi when it came public at the end of March. I bought it on its first day in the market. And, as I mentioned, I bought DocuSign a little while ago, too. That’s mainly because I had taken the time to really get to know those businesses, reading the S-1 and getting familiar with the companies and, of course, the brand recognition. So, I felt OK going in. But again, in that first year, I think it’s worth waiting, especially because a lot of these IPOs have lockup periods, where insiders and executives have to wait, usually it’s six months after the IPO when they’re selling. There’s usually some kind of artificial pressure on the stock anyway. So patience can be rewarded with IPOs.
Bush: A fun peek behind the curtain just because we were both on the Rule Breakers team and interacted with David Gardener about recent IPOs and such. He has a great analogy that he uses. I remember I brought up a recent IPO and the first quarter was not very good. He said, “They Great Wolfed.” I was like, “What do you mean they ‘Great Wolfed’?”
Well, apparently, Great Wolf Lodge was an early Rule Breakers recommendation. I went and looked at it and it was one of the very few times that it was recommended straight out of the IPO. They had a bad quarter. David sold it immediately. So, that burned in my mind. Again, we should watch the first quarter and see how it does because a lot of times it does not live up to the hype that was built in the prospectus.
Argersinger: We’re almost out of time and I know there was some questions we didn’t get to. Oh, here we go! David G.! David G.!
David Gardner: Thank you! I just want to fill out the Great Wolf story really quickly. I see it’s like 30 seconds, but I still want one more question. All I’m going to say is thank you, Aaron! That is exactly right. The main point was learned from Howard Schultz. Howard Schultz is the founder of Starbucks and his firm was an early investor in our company. We got to hang and learn from Howard in some of our early days.
One of the things he said was he ultimately wanted The Motley Fool to go public. He was saying, “Guys, so the biggest thing if you’re going public is you need to know your next four quarters out of the gate. You have to have your business to a point where it’s mature enough that you have it locked down.” Howard is an intense guy, so this sounds intense. I don’t even know if it’s true, but this is what he said. He basically said, “When you go public, that is your big moment, so you need to make sure that Wall Street gets behind you. If you fail them coming out, they will walk away forever from your company.”
Howard had this intensity around the idea of going public that you really have to have your business at a predictable state, which, by the way, I don’t think we’ve ever had. Maybe we’re there now, although I don’t think we’re going public. Talk to Tom if you’re interested, but it was Great Wolf. I recommended it. I liked it. Right away, their first quarter, they’re like, “Oops. No, sorry. Surprise. It’s disappointment.”
That to me said that company was just going public to go public. They really didn’t have it together. So, it was a quick trigger to exit it, which we very rarely do, as you know, if you follow Rule Breakers or Stock Advisor or really The Motley Fool and, of course, you do because you’re here. That’s the story. It’s ultimately the reason I wanted to come grab the mic was to thank Aaron for knowing that reference, and then to make sure that you knew it was that conversation with Howard Schultz and what he inculcated on me at a younger age.
Anytime I see an IPO come out and in the first one or two quarters they’ve blown it, then I’m thinking they didn’t go public for the right reasons probably. It’s unfair. I’m sure there are exceptions, but that’s it. OK, sorry!
Argersinger: Thank you, David!
Bush: Thank you!
Southwick: Well, that’s the show. It’s edited officially by Rick Engdahl. Hey, let’s have a disclaimer. As always, The Motley Fool may have recommendations for or against the stocks we talked about on the show. Don’t buy and sell stocks based solely on what you hear here.
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