Tag: private equity

Bumble bonanza almost too good to be true

bumble

It’s a VERY happy Valentine’s Day for Bumble CEO Whitney Wolfe Herd. On Thursday, Wolfe Herd (reportedly) became the youngest female CEO ever to take a US company public when the Austin-based dating app’s IPO raised $2.15bn and the shares surged about 63% on their Nasdaq debut.

By the end of the week, Bumble was carrying a market cap of $15bn (and she owns about 10% of the company herself). That’s mind-blowing considering private equity firm Blackstone took control of Bumble barely a year ago in a transaction that valued the company at just $3bn.

Now I don’t know, maybe there were some non-financial reasons why Blackstone found such a willing seller in Russian entrepreneur Andrey Andreev, who started Badoo in 2006 and then helped Wolfe Herd start Bumble in 2014. The umbrella Bumble company that went public owns both Bumble and Badoo, the former being the “women-first” mostly US-centric app and Badoo being better known internationally.

Consider here that Blackstone not only takes home the bulk of the IPO proceeds (around $1.7bn of the proceeds are being used to buy back its equity interests), but it still holds a roughly 60% economic interest in the company.

Blackstone also collected the bulk of a $330m debt-funded distribution to pre-IPO holders paid in October. And remember this is just a dating app.

We also know Blackstone used lead left underwriter Goldman Sachs‘ new-fangled hybrid auction process (also used on the DoorDash and Airbnb IPOs late last year) to try to get a better IPO price than it might from a traditional bookbuild. Yet the stock still ran, probably because the Bumble name was recognized and resonated with the Robinhood/retail crowd in the aftermarket.

And remember all this is happening during Covid-19, a time when the romantic notions have been thwarted by everyone being confined in their homes (though this WSJ article suggests use of dating apps during Covid rose strongly).

The bullish view on Bumble is that its operating model of only letting women make the first move will mean that many, many women will join its site and the men will have no choice but to follow.

And while Bumble is not nearly as profitable as its more diversified rival and comp, Match, Bumble has big earnings upside as it improves its margins to Match’s level. Bumble’s adjusted Ebitda margin was 26.3% in the period from January 29, 2020 to September 30, 2020, whereas Match margin is consistently up around 40% (the IPO filing is here, incidentally).

Maybe Bumble is a great investment and, yes, it is tough to be short at the moment.

But in a market many believe is priced for perfection, there are at least a few reasons to wonder whether Bumble can meet the lofty expectations now built into its stock price.

For one, ask yourself why Blackstone cashing in its investment so aggressively and so quickly.

Logically it would have been better to wait for Bumble to show better post-Covid numbers, unless it turns out the post-Covid world is tougher and the dating app market more competitive than expected.

Of course, Blackstone is just being smart in taking advantage of a white-hot IPO market to effectively cash its original investment and leave only house money at risk.

By the way, there is nothing stopping women from making the first move on other dating apps. And if blocking men from doing so is such a winning strategy for Bumble, how hard is it for some other dating app to do the same? I just pose the question.

Also lost in the fanfare is that Bumble’s average revenue per paying user fell slightly last year, in part as it tweaked its subscription pricing during the pandemic. As the prospectus points out, if Bumble can’t get more money out of each existing paying user, it will have to rely more on turning non-paying customers into payers. Bumble is yet to really prove it can do that since only 2.5m of its circa-40m users are paying for the privilege. The point is that Bumble’s metrics are not as pristine as the stock price action seems to imply.

Personally I think this is yet another stock that has raced well ahead of its true value (it now trades at more than 25x trailing revenue). I think few investors in their hearts (!) would contest this statement. And with markets at a point at which it is hard to think they could get any better, to me it seems a decent bet that Bumble will struggle to maintain its current levels ($75.46 on Friday) once the post-IPO honeymoon period is over.

Let us know what you think.

US IPO market gets its pants on with Levi IPO, but challenges linger

Levi’s on sale at a Manhattan store.

Jeans maker Levi Strauss & Co surged 31.8% on debut today after pricing its IPO above range for base proceeds of $623.33m, the most confident sign yet a new-issue revival is under way after a disastrous start to the year.

Levi Strauss is the biggest IPO of the year so far and comes ahead of chunky near-term offerings such as Lyft, Tradeweb Markets and Change Healthcare, and maybe Uber (looking like April timeframe) as the biggest of them all.

The demand for Levi Strauss was clearly very strong, even stronger than you might expect for a company up against the vagaries of the fashion retail business.

This is a brand that has stood the test of time, the company has some growth (14% at the top line last year) and has been able to expand its margins by selling direct to the consumer, the trend that is likely killing off large parts of the traditional retail sector.

One reservation – apart from whether the company’s current growth is really sustainable – is that the controlling Haas family sold some of its stake at the IPO and may not be done. The prospectus is not explicit about their plans, which is probably intentional, but it means that a secondary sale is not out of the question later this year.

As investors counted their winnings, it was easy to miss that another IPO scheduled for this week, human resources software company Alight, opted to defer its IPO ahead of pricing tomorrow night.

Alight is backed by private equity firm Blackstone, which pulled the plug as investors showed reluctance to pay up inside the $22-$25 range for a company that is not growing as fast as the usual software IPO.

In fact, the way the financials are laid out in the prospectus, it is difficult to make prior-year comparisons.

The outcome shows that investors are not in a mood to buy anything, despite the dearth of IPOs so far this year. This could also be read as investors being extra cautious about current valuations, including those of the peers against which Alight was valued.

The other mark against Alight is its private equity backing, and it is a legitimate question whether the sponsor-backed IPO market, a major avenue for the monetization of sponsor investments, is broken.

Though Blackstone was able to bring a large number of its US portfolio companies public in the past five years, it hasn’t done so many in the past year or so.

The same goes for the other big private equity firms, now the center of much power on the Street (in part because they pay the biggest fees to investment banks).

The big miss last year was Apollo Global Management’s IPO of home security firm ADT. The deal priced well below range but ADT stock still trades at price less than half ($6.57 today) the level at which it went public at ($14) in January last year.

In fact, the private equity firms have produced some great public companies over a longer timeframe, but it is often the case that they perform poorly early on (2015’s First Data IPO is another classic example) because private equity firms on principle do not sell assets cheap.

Private equity firms have also gravitated to traditional industrial companies that can be bought cheap for their lack of growth but still generate consistent enough cashflow to support their financial engineering – that is, the pay down of hefty debt loads.

These companies typically come to market with high debt levels as a legacy of their leveraged history, though usually IPO proceeds are applied to bringing down debt to more manageable levels.

Change, a health IT company formed from a deal with drug distributor McKesson, is the next Blackstone portfolio company looking to get public. It is said to be looking to raise $1.5bn-plus but the Alight outcome suggests it is no fait accompli.