Despite a worldwide pandemic, surging stock markets have paved the way for a record number of companies to go public last year. A total of 407 companies went public through IPOs last year, up more than 107.1% year-over-year, according to a Statista report. Global IPO activity rose 42% from the year-ago, representing 1,591 listings that raised $331 billion. Listings in the United States raised approximately $127 billion, up 118% year-over-year. Special Purpose Acquisition deals (SPACs) also increased in 2020, with 247 companies going public through reverse mergers, representing a 320% rise year-over-year. The IPO market capitalized on the skyrocketing stock markets last year. However, investor exuberance has driven these IPO stocks to significant overvaluation over the past year.
The reopening of economic activities and an anticipated fast-paced recovery by the U.S. economy have re-introduced some stability in the markets over the past couple of months as investors resumed a more fundamental approach toward investing. Furthermore, with most companies shrugging off pandemic-led business disruptions to generate robust profits, the overvalued IPOs last year are losing momentum, given their generally weak financials and bleak growth prospects.
Companies such as Unity Software, Inc. (U), QuantumScape Corporation (QS), and Qualtrics International Inc. (XM), which made stellar stock market debuts last year, have declined more than 25% year-to-date because investors are shifting now to quality bargains. So, given their unfavorable revenue and earnings growth potential, we believe these stocks are best avoided now.
Unity Software, Inc. (U)
U is a 2D and 3D software developer that made its public debut on September 18, 2020. As a major video game developer in the U.S. country, U’s shares were initially priced at $52. However, the stock opened at $75 on the first trading day, up 33.7% from its initial valuation. The stock reported trading volume of $20.62 billion on the first day. The company raised $1.30 billion through the IPO, giving it a pre-market valuation of $13.70 billion. Its market cap stands at $27.03 billion, as of April 9.
However, following its stellar IPO, U has lost its luster given its weak financials. Despite being one of the most popular names in the video gaming industry, with games such as Pokemon Go and Iron Man VR in its product pipeline, the company’s operating margins remain depressed. U’s operating margin declined 600 basis points year-over-year to negative 37% in the fourth quarter ended December 31, 2020.
U’s total revenues increased 39% year-over-year to $220.30 million in the last reported quarter. However, the company’s revenues from its “Strategic Partnerships and Other” segments declined 19% from its year-ago value to $19.10 million. Its loss from operations was $80.80 million, up 66.3% from the same period last year. The company lost 31 cents per share over this period.
U has declined 44.4% since hitting its all-time high of $174.94 on December 23, 2020. Also, the stock has declined 36.6% year-to-date.
On March 24, U announced a collaboration with HERE Technologies to develop next-generation embedded automotive human-machine interface user experience with state-of-the-art rendering capabilities. These technologies have implications for real-time 3D in-vehicle experiences. The company partnered with Verizon Communications, Inc. (VZ) nearly three months ago to jointly develop mobile edge compute gaming and enterprise applications using 5G. And on March 9, U acquired technology developer VisualLive for cost-effective augmented reality construction.
Despite these partnerships and acquisitions with some of the leading companies in the industry, U’s growth trajectory looks bleak. Analysts expect U’s EPS to remain negative in 2021. The consensus revenue estimate of $970.83 million indicates a 25.7% rise year-over-year.
U has a Stability grade of D in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #18 of 26 stocks in the Entertainment – Toys & Video Games industry. Get all U Ratings (Momentum, Sentiment, Value, Growth, and Quality) here.
Click here to view the top-rated stocks in the Entertainment – Toys & Video Games industry.
Click here to check out our Video Game Industry Report for 2021
QuantumScape Corporation (QS)
Solid-state lithium battery manufacturer QS is one of the most prominent players in the EV battery manufacturing space and is backed by Bill Gates and Volkswagen AG (VWAG). Rather than go down the traditional IPO route, QS made its public debut through a reverse merger with Kensington Capital Acquisition on November 27. Shares of QS gained nearly 50% on the first day of trading and hit its all-time high of $132.73 within a month.
However, QS has declined 65.5% since hitting its all-time high of $132.73 on December 22, 2021. And the stock has declined 45.1% year-to-date. The company’s pre-market valuation including PIPE funding stood at $3.30 billion. QS’ current market valuation (as of April 9) stood at $17.40 billion.
On March 31, QS achieved a technical milestone in its EV-battery development technology, following which VWAG announced an additional $100 million investment into the company. QS has received total funding of $200 million from the German automaker and is poised to become the company’s primary battery supplier. With VWAG gunning to become one of the biggest EV manufacturers in the world, QS is expected to enjoy steady demand. Furthermore, QS raised $478.40 million through an underwritten public stock offering that closed on March 30.
Despite having impressive growth prospects, QS is currently facing charges on account of alleged misleading statements and incomplete disclosures regarding recent events. Multiple law firms have filed suit against QS charging that the company presented false or overoptimistic data regarding its battery power, battery life and energy density. Furthermore, the class action lawsuits allege that QS is unlikely to scale its battery technology to run EVs.
QS’ operating expenses have increased 76.7% year-over-year to $22.73 million in the fourth quarter ended December 31, 2020. Its losses from operations nearly doubled from its year-ago value to $30.19 million, while its net loss rose 4,764.1% from the same period last year to $694.74 million.
Though analysts expect QS’ EPS to rise 93.6% in the current year, its absolute earnings are projected to remain negative until 2022.
QS has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The stock also has a D grade for Value and Stability.
Of the 66 stocks in the Auto Parts industry, QS is ranked #59. In total, we rate QS on eight different levels. Beyond what we’ve stated above, one can get QS Ratings for Sentiment, Momentum, Growth, and Quality here.
Click here to view the top-rated stocks in the Auto Parts industry.
Click here to checkout our Electric Vehicle Industry Report for 2021
Qualtrics International Inc. (XM)
Experience data management platform XM began trading on Nasdaq Composite on January 28. XM’s shares were priced at $30, slightly above the price target of $27-$29. Approximately 51.70 million shares were sold at $30 each, raising $1.55 billion. However, the stock opened at $41.85, up 39.5% from its projected price. The company’s valuation on the first trading day stood at $27.30 billion. However, XM’s market capitalization has since declined to $16.44 billion, as of April 9.
On April 8, XM partnered with IBM Corporation (IBM) Japan to help companies gain rapid access and realize the full value of Qualtrics Experience Management Platform. Essentially, IBM has become XM’s first certified reseller and implementation partner in Japan. Earlier this month, the company partnered with ServiceNow, Inc. (NOW) to leverage the latter’s digital workflow technology with Qualtrics experience management to deliver next-generation employee experience and customer service.
These developments should allow XM to scale its revenues in the current year. However, despite partnering with industry leaders to expand its proprietary software’s reach domestically and overseas, XM’s bottom line is expected to remain negative until at least 2022.
XM’s EPS is expected to decline 54.5% in the current year and remain negative until 2022. The Street expects XM’s revenues to rise 24.9% from the same period last year to $953.57 million in fiscal 2021.
Despite remote working’s continuation for more than a year already, XM has failed to generate adequate earnings from its employee management software. XM’s non-GAAP operating loss stood at $4.70 million for the fourth quarter ended December 31, 2020. Its Non-GAAP net loss came in at $8.10 million over this period, translating to a loss of two cents per share.
XM declined 45.3% to hit its all-time low of $31.32 on March 25 since hitting its all-time high of $57.28 in February. In addition, the stock has declined 29.5% year-to-date.
XM has a Value grade of D in our proprietary POWR Ratings system. XM is ranked #55 of 117 stocks in the D-rated Software – Application industry. In addition to the grades we’ve highlighted, one can check out XM Ratings for Sentiment, Momentum, Growth, Stability and Quality here.
There are 29 stocks in the Software – Application industry with an overall rating of A or B here. Click here to view them.
Click here to check out our Software Industry Report for 2021
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U shares were trading at $94.71 per share on Monday morning, down $2.55 (-2.62%). Year-to-date, U has declined -38.29%, versus a 10.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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