Romans Chapter 5 verse 10 states, "For if, while we were God's enemies, we were reconciled to him through the death of his Son, how much more, having been reconciled, shall we be saved through his life!"
It's always refreshing to recognize God's love for me, despite the mistakes and sin in my life. Jesus Christ died on the cross to pay the price for my sin. I am completely unable to atone for my sin, His death was caused by my sin. The Good News, or Gospel is that Jesus rose from the dead, conquering death offering salvation to all. There is no greater hope than this.
When it comes to investing and reconciliation, the intent is to establish a connection with a good investment opportunity. For IPOs, it's not always an easy one as there are numerous variables at play. During the right IPO opportunities, I have found that over time, many successful IPOs have afforded investors great buying opportunities on day one. With market volatility at the forefront, it simply adds further difficulty, especially for projecting mid-term potential.
Two IPOs on the horizon that I am very interested in include Coinbase Global (COIN) and UiPath, Inc. (PATH). I have been providing Portfolio Moves forum updates for both Coinbase Global and UiPath. I'll keep it very short and high-level here to provide some views on how I'm approaching each IPO.
For those yet to see the insane financial performance generated by Coinbase Global in 2021 Q1, I recommend taking a look at the most recent 8-K filing, here. The key highlights from a financial modeling perspective include 6.1 million Monthly Transacting Users, MTUs, Trading Volume of $335 billion, $1.8 billion in Revenue, and a $765 million Net Income midpoint.
Coinbase Global will be going public via a Direct Listing next week on Wednesday, April 14th. D.A. Davidson increased their PT to $440 per share, which I think will not be any price level that first day investors will get a shot at. In fact, I've adjusted my financial model to assume that Coinbase Global will be generating around $5 billion in Revenue, which may end up being conservative. I am looking at a first day SP anywhere from $625 to $750 per share.
I think it is very illuminating to review legacy financial institutions versus newer market takers. There is a major reoccurring theme - growth. Whether looking at PayPal, Square, SoFi, Affirm, and notably, Coinbase Global, they are all growing at rates that major bank/credit card companies will never ever come close to in the future. In fact, many will see accelerated declines, and for those still witnessing some growth, an inevitable decline as market share losses mount across industries.
For me, the two most important legacy companies on this list are Visa and Mastercard. They still offer investors adequate growth prospects for the mid-term, and trade at very high multiples for EV/Revenue and OCF per share. Many of the newer market takers trade at similar two-year EV/Revenue multiples including Coinbase Global.
Coinbase Global is a spitting image of Visa and Mastercard. In fact companies like Visa, Mastercard, PayPal, and Square have all attempted to get in on the Cryptocurrency shift. However, no one comes close to Coinbase Global's volume scale, let alone products and services, and regulatory alignment at the global level. None of these companies will be able to compete with Coinbase Global over the mid-term, let alone long-term due to their amount of resources to non-Cryptocurrency operating segments.
Based on the trajectory, Coinbase Global potentially is headed towards $20 billion in Revenue by 2025, with the opportunity to achieve a 40% FCF margin. The company's business model is precisely the same as Visa nd Mastercard - high volume, translating to robust Net Revenue growth, with high OCF/FCF margins.
I am looking for Coinbase Global to have an 18-month PT towards $1,250 per share with Revenue hitting anywhere from $8-$10 billion. Mid-term, I am modeling a PT towards $2,000 per share. It makes a lot of sense why Jamie Dimon at JPMorgan Chase is so upset, as he knows that Coinbase Global will be potentially worth more than his company over the next five years.
The primary risk for investors is volatility with Cryptocurrency prices, namely Bitcoin. Volatility is concerning, but if we look at the pattern of appreciation in Bitcoin over the past decade, the base to ceiling during each peak cycle continues to increase. As demand further intensifies, the expectation is that this trend will continue and at some point, greater stabilization will occur - with some believing that we are seeing this happen at the moment.
For aggressive growth investors, this creates a tremendous scenario whereas Coinbase Global may see substantial downward pressure at times, offering excellent accumulation opportunities. Modeling a company like Coinbase Global is very challenging, but this is a landmark event. For traditional/legacy incumbents that have been naysayers, they are simply going to be bystanders watching the future unfold before them - the heydays are over.
I will be very aggressive in initiating a position with Coinbase Global. In the event for some reason an opportunity presents itself to add at $500 or lower, I would likely initiate a position towards 2.5% of the portfolio. If the SP opens closer to the $700 level, I would probably initiate from 1.5% to 2%, slightly lower.
UiPath recently filed an initial S-1 on March 26th, see here. The company is focused on improving the enterprise workforce through of course, robots! I'm not going to attempt to breakdown all the finite details of UiPath's process and platform (see the link please and enjoy yourself!), but I will attempt to summarize and illustrate what the potential of investing in this company is all about.
As I understand UiPath's approach, the company is focused on automation through artificial intelligence, AI, using robots. We are all familiar with the robotic technology advancements for Amazon fulfillment centers as well as automotive OEM manufacturing facilities. But UiPath is focused on a platform that allows for employees and departments to develop automation processes to create greater efficiencies, and equally important, unlock employee fulfillment regarding work priorities.
For those of us working in office environments, we can all attest to the "expense report" that is time consuming, a necessary evil, that is one of many administrative tasks that take a portion of the day away, especially as menial tasks pile up. UiPath through its Automation Hub and adjacent integrated products is looking to provide robots to perform the more mundane tasks that fit this example.
With this in mind, from a financial performance perspective, UiPath's Revenue grew from $336 million to $605 million during fiscal year 2021, 81% growth. Revenue includes Licenses, Maintenance & Support, and Services & Other with the former two generating the substantial amount of Revenue - 57% and 39% respectively for 2021.
The key metric for the company is its Annual Renewal Run-Rate, ARR, which increased by 65% to $580 million for 2021. This growth performance translated nicely to an inflection in Cash Flows, with OCF/FCF margins at 5% and 9% respectively. Nominally, improvement reflected nearly $400 million.
The challenge today, is that the initial S-1 for UiPath does not include Shares Outstanding or an assumed pre-IPO SP. I've assumed Shares Outstanding at 25% higher than what was reported for fiscal year 2021. The most recent information on UiPath's valuation was around $10 billion, so I've assumed a first day trading price equating to a $20 billion valuation, which may end up being low.
Similar to Coinbase Global, UiPath is a leader within its peer group when looking out over the near-term for growth expectations. I have initially modeled the company to see a decline in its growth rate of 81% for 2021, to an average just below 40%. At the same time, I am assuming Cash Flow inflection continuing towards an OCF margin at 15%.
The most interesting point that I found in the filing regarding UiPath's performance, was that 75% of the 81% growth was from existing customers. UiPath has just below 8,000 customers including many major corporations whether legacy, or newer market takers. UiPath considers its addressable market potential over $60 billion, and for those looking to be more conservative, closer to $30 billion by 2025, depending on how you look at different market segments.
Based on this, I am modeling Revenue growth from the $605 million baseline to average annualized growth of 32% over the next five fiscal years, with OCF margin accelerating further towards 25%. With an initial SP at $100 per share (guestimate right now), the mid-term opportunity is not as lucrative as Coinbase Global, but investors still could see an annualized return north of 15%. Peers like Appian are overvalued in my opinion, while NICE and Pegasystems are at risk of being leap-frogged by UiPath over time, justifying a premium.
The potential for UiPath is very interesting and over time, could become much more robust than what I am currently modeling. My concern is that the company may receive too much of a premium for the IPO day. If the SP were to move higher towards $125 to $150, it would materially impact potential annualized investor returns, and require growth estimates to be expanded significantly to justify stronger investment returns. This could end up being the case, however, I would be much less interested in initiating on day one in the event the SP moves further from $100 level. The caveat is that Shares Outstanding being much less than the 25% premium assumed could offset this, so ultimately, more information will be required before definitive decisions can be made.
I am cautiously optimistic that as the S-1 filing is amended, that the investment opportunity will remain as lucrative. In any case, I am more likely to initiate a position with a 1% weighting from the portfolio's total on IPO day.