Investing

Merrill Lynch Says 4 Broken 2019 IPOs May Have Huge Potential Upside

Lee Jackson

Published: November 1, 2019 6:55 am

Last Updated: January 30, 2020 1:42 pm

One of the biggest stories on Wall Street for 2019 was the rebirth, and then the crash and burn, of some highly touted initial public offerings (IPOs). The flameout of this year’s unicorns may remind investors of what happened to Facebook seven years ago. On May 18, 2012, Facebook held its initial public offering and, at that time, it was the largest technology IPO in U.S. history. Facebook offered 421,233,615 shares at a price of $38 per share and raised $16.007 billion through that offering.

The deal was supposedly massively oversubscribed but ended flat the first day of trading. Within a month, the shares traded down over 30%, and the slide finally stopped when the stock hit a low of $17.55 in September of that year. Since then, the rest is history, as the stock has traded as high as $218.62.

Some of this year’s hottest deals have done the same thing, and it may be time for investors to revisit some of the battered companies. We screened the Merrill Lynch research database looking for broken IPOs that still are outstanding stories, that may have been the babies tossed out with the proverbial bathwater.

We found four companies rated Buy at Merrill that have some serious upside to the firm’s target prices. While only suitable for investors with a very healthy risk appetite, those willing to take the plunge could be richly rewarded down the road.

CrowdStrike

This cybersecurity stock has been cut in half and offers some tremendous value. CrowdStrike Holdings Inc. (NASDAQ: CRWD) is a leader in the endpoint protection platform (EPP) market. EPP solutions help protect enterprises’ internet-connected devices from cyberattacks, and there is a market shift from signature based on-premises solutions to cloud-based platforms that use machine learning.

CrowdStrike’s platform is one of the few 100% cloud-based architectures and is uniquely positioned to displace incumbents with its platform breadth, including advanced detection and remediation capabilities.

The company posted solid second-quarter results in September, and the analysts noted this at the time:

CrowdStrike reported solid second quarter results, with revenue and earnings per share better than expected at $108.1 million/-18c versus Street’s $103.8mn/-23c. Key metrics such as customer adds, ARR growth, net retention, and multi-product adoption all improved; margins show leverage. Third quarter guidance was also strong; valuation remains a key risk but we expect continued outperformance; reiterate Buy.

The Merrill price target for the shares is a massive $103. That compares to the much lower Wall Street consensus target of $83.89. The last trade on Thursday came in at $49.91. CrowdStrike’s lock-up period expires on Monday, December 9.

Fastly

Shares of this edge cloud computing company have been blistered and offer an incredible entry point as well. Fastly Inc. (NYSE: FSLY) is an emerging technology leader in the high-growth content delivery networking (CDN) market. CDN vendors deliver content for enterprises and media/content providers, charging per bandwidth delivered.

Fastly’s network architecture is a combination of best-of-breed hardware and a patented software stack based on open source protocols. This unique stack enables the company to immediately deliver content globally and provide differentiated edge compute services and programmability.

Following some disappointing results, the stock was hit. The Merrill team is still very positive and noted this at the time:

Fastly reported second quarter revenues/EPS of $46.2 million/-16c vs our $46.5 million/-11c; the headline earnings per share miss was due to stock split timing. Second quarter revenues grew 34% year-over- year, Enterprise customers grew 38% year-over-year, and dollar based net expansion rate of 132% was up 2% quarter-over-quarter. Fastly is executing well: Enterprise sales cycles are getting shorter, and several large deals signed in the second quarter.

Merrill has a price target of $26, and the consensus target was last seen at $25.33. The stock closed Thursday at $20.02 a share. Fastly’s lock-up period expires on Wednesday, November 13.

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This is another cyber and data security company with a stock that has been shellacked since the IPO. Ping Identity Holding Corp. (NYSE: PING) is a leader in identity access and management. Its IAM products safeguard enterprise applications and data by providing controls around user authentication, access and more.

Ping’s single-sign-on technology helps streamline user workflow by providing a single password for multiple applications to reduce log-ins. Additional product features include consumer identity management, Internet of Things (IoT) and API management. Ping differentiates with a history of complex deployments across hybrid networks.

The Ping Intelligent Identity platform provides customers, employees, partners and, increasingly, IoT, with access to cloud, mobile, SaaS and on-premises applications and APIs, while also managing identity and profile data at scale. Over half of the Fortune 100 choose use the company for the identity expertise, open standards leadership and partnership with companies including Microsoft and Amazon.

The $21 Merrill price objective compares with the $21.85 posted consensus target. The shares closed most recently at $16.71 apiece. Ping’s lock-up period expiration is March 7, 2020.

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Uber Technologies

This is the highest profile company in the broken IPO club, and it may be the most exciting idea of all. Uber Technologies Inc. (NYSE: UBER) is a mobility platform that services 63 countries, more than 750 ridesharing markets and over 500+ Eats markets, and nearly half of its core platform revenue is generated outside of the United States.

The company’s monthly average paying customers represent 1% to 2% of the world’s population on a monthly basis. For rides, Uber acts as a middleman, connecting riders with drivers. For Eats, the market is three-sided, connecting customers, restaurants and drivers. Uber also has an emerging freight business.

The company’s main competition is Lyft, and the analysts discussed recent comments from it:

At the Wall Street Journal Tech Live event, Lyft CEO Logan Green announced that the company is targeting EBITDA profitability in the fourth quarter of 2021. Lyft’s commentary supports view that Uber will continue to benefit from decreasing competitive intensity in U.S. ridesharing. We see opportunity for Uber stock to benefit from increasing disclosure, and see potential stock support from sum-of-the-parts valuations.

Merrill has set a $44 price target, but the consensus target is higher at $48.73. The stock closed Thursday at $31.50. Note that the lock-up of Uber shares ends November 6.

These four stocks have been absolutely blasted since the sentiment for IPOs that don’t make money soured. With the potential for additional shares to hit from lock-up expiration’s, it makes sense to wait to buy shares until they all have expired. A deluge of additional shares may make these battered stocks trade even lower. With that in mind, the upside could also be staggering.