I was hunched over my keyboard in a dark, desolate, holiday-thinned office when a lone phone call shattered the silence…
It was the mighty CNBC, and they wanted me to appear on Closing Bell in exactly one hour.
Now, I’m not typically a camera-shy person — in fact, more than a few friends have not-so-affectionately referred to me as a “ham”…
But my predilection for narcissism and attention was buffered by the fact that I wasn’t feeling particularly inspired by the day’s topic: 2014 tech IPOs.
Honestly, I just haven’t covered the topic in these pages — and for good reason…
I watched in abject horror as the Facebook IPO completely face-planted after it launched. I stood amongst the peanut gallery, hurling rotten tomatoes at Groupon as it went public — and then subsequently fell off a cliff, pulling early investors down in a bloody tumble.
My thinking was I would rather stay away from tech IPOs entirely.
But I’m beginning to think I was wrong…
Most IPOs typically enrich the initial backers — who buy the stock at artificially low prices — and hose the individual investor, who buys up whatever is left at inflated prices. He is the one left holding the bag when the big guys unload their shares and run for the hills.
However, after watching the ascendancy of Twitter’s IPO, I decided I really shouldn’t be playing the old, grouchy Luddite if I want to keep banking serious gains.
The U.S. IPO index has returned an average of 30% gains in the third quarter of 2013, according to IPO research firm Renaissance Capital. That average includes the miserable stinkers that seemed doomed before they were even announced. It was the single biggest year for tech IPOs since the tech boom…
I can no longer afford to ignore the serious profit potential of some of these budding new companies.
Simply put, some will offer life-changing profit potential.
Some will build themselves into international juggernauts.
And some will be thrown on the scrapheap of history with Pets.com and the rest of the tech bubble garbage that sunk the market in the early 2000s.
So let’s highlight some companies that have the best chance to skyrocket…
Fed-Drunk IPOs
It’s the elephant in the room, so let’s quickly acknowledge it and move on: the Fed is the real reason why IPOs are looking so attractive right now.
After the Fed’s tapering speech, the stock market hit a new all-time high. That tells me that the rest of 2014 should be all systems go for new IPOs, if only because it is one of the only areas where stocks aren’t sitting at all-time highs. In high-flying markets like these, investors crave something new, something fresh — something untouched by the last five years of Fed-drunk highs.
There’s nothing sexy about buying blue chips at all-time highs.
They want freshly driven snow. They want to be in on the next Twitter, Facebook, or Netflix. They want blockbuster returns.
And I can’t blame them…
There are some very compelling companies going public this year that will meet those lofty goals — and there are some that will no doubt fall flat after the Fed pulls the rug out from under them.
Here are the two I think will remain standing strong…
Square, Inc.
Co-founded by Twitter founder Jack Dorsey, Square allows small businesses to accept payments via smartphone.
I first noticed its value when I was shopping at a local art festival in Baltimore a couple summers ago. There were two vendors whose artwork I really enjoyed. The first only accepted checks and cash. I had neither, so I took my money to the booth next door…
There I found a wonderful painting of the Baltimore skyline. When I asked if he accepted credit cards, he smiled and whipped out his iPhone, which had this device attached to it:
He swiped my card, I signed directly on his iPhone, and I left with my painting.
The first vendor got a whole lot of nothing…
At that point, I knew this would be the future of payment processing, and I tried to find out all I could about the company.
For one, it’s the biggest player in a market that is certain to expand. Just look at this Business Insider forecast for mobile payments:
Sales have already hit $550 million this year on a whopping total payment volume of $20 billion.
Square is currently in talks with Goldman Sachs and Morgan Stanley for its 2014 IPO. It has already raised almost $400 million from big name backers like Yahoo CEO Marissa Mayer and globetrotting billionaire and Virgin founder Richard Branson.
Now, it kicks most of that money back to credit card companies like VISA and MasterCard, but there is still plenty of cheddar left over for a profit-generating monster. Dorsey is already secretly discussing a plan to make Square profitable by 2015, according to an inside leak to the Wall Street Journal.
Aside from the Square card readers that allow financial transactions to be conducted via smartphone, the company is currently developing “virtual wallet” software that would allow consumers to pay for things without using a credit card at all.
This will be a big company, but just how big remains to be seen…
We’ll get a glimpse when we find out how much they decide to value their stock when they finally do go public.
Airbnb
Now, the one company I got to talk about on my brief moment on CNBC was Airbnb.
I love Airbnb… and have for some time.
When it launched in 2007, it averaged about a booking a day. Now, travelers are using Airbnb to scoop up a rental property every two seconds…
That’s some serious growth.
That’s because it is a legitimately awesome company. I know because I’ve used it several times to book some incredible vacations.
For example, I tapped into Airbnb’s database last year when planning a trip to Austin, Texas. My brother, some friends, and I went down for the South by Southwest Festival and were having some serious trouble finding an available hotel room that wasn’t booked — or wildly overpriced…
After checking out Airbnb’s listings for just a few minutes, I found a plethora of beautiful homes just minutes from the bustling downtown area. The one we chose was a fraction of the cost of a boring hotel room — and boasted a full kitchen, rooftop deck, private pool… even a wet bar!
And keep in mind, the home was far cheaper overall than if we had rented a series of hotel rooms.
Not only was the environment of the house more inviting than a hotel, but I was also able to chat with the owner of the home before our trip. She gave us a wealth of information about local attractions and restaurants that we would not have taken advantage of had we opted for a traditional hotel stay. And when we arrived, she had a bowl of the best guacamole I’ve ever had waiting for us!
Sheraton, eat your heart out…
Here’s how Airbnb describes itself:
Whether an apartment for a night, a castle for a week, or a villa for a month, Airbnb connects people to unique travel experiences, at any price point, in more than 33,000 cities and 192 countries. And with world-class customer service and a growing community of users, Airbnb is the easiest way for people to monetize their extra space and showcase it to an audience of millions.
The only thing preventing Airbnb from completely upending the hospitality industry is local regulations. Since hotels have deep coffers, you can expect them to fight Airbnb tooth-and-nail for their share of travelers’ cash.
We’ll be covering those battles leading up to its IPO announcement.
Peer-to-Peer Profits
As you can see, a new paradigm is emerging in the economy: the peer-to-peer market.
Both Airbnb and Square have — so far — successfully killed the middleman. Why pay for an expensive credit card processing machine when you can simply plug a little ‘dongle’ into your phone and start taking orders? Why book a stuffy hotel room for more money than a cozy two-bedroom house with a fireplace and kitchen?
I see no reason, which is why I have such high hopes for both of these companies…
You see, there are three main criteria that get me excited about stocks. They are products and services that I have used, enjoyed, and understood. Both Airbnb and Square are three-for-three. And that’s what I would have told CNBC if I hadn’t been relegated to a 30-second sound bite…
That being said, I want to sincerely thank you all for reading these pages during our first year in service. Your support, comments, and critiques have been instrumental in our analysis. Keep them coming! We want to hear the good, the bad, and the ugly, so please send us your comments to customerservice@outsiderclub.com.
I’ll see you in 2014… with an army of profit-hungry colleagues to deliver you the best financial advice this side of the Mason-Dixon.
So raise a toast…
To being on the outside.
Happy New Year.
