IPO fever hit the stock market earlier this year. Companies were being floated every other week it seemed, offering investors tempting new possibilities.
However, it often pays to let the launch fireworks die away and see how the stock settles down. In many cases, you can pick up IPO shares cheaper at a later date.
That’s certainly the case with three digital businesses that all floated earlier this year: online white goods retailer AO World (LSE: AO), fashion etailer Boohoo (LSE: BOO) and property portal Zoopla (LSE: ZPLA).
The table below shows some key facts and figures for the three companies.
| AO World | Boohoo | Zoopla | |
| Year founded | 2000 | 2006 | 2007 |
| IPO (and early peak) share price | 285p (378p) | 50p (70p) | 220p (269p) |
| Current share price | 250p | 45p | 197p |
| Market cap | £1,052.6m | £505.4m | £823.6m |
| Net cash | £43.9m | £55.7m | £31.0m |
| EV (market cap minus net cash) | £1,008.7m | £449.7m | £792.6m |
| Revenue (ttm) | £428.5m | £125.6m | £80.2m |
| Adjusted EBITDA (ttm) | £15.1m | £14.9m | £39.6m |
| EBITDA margin | 3.5% | 11.9% | 49.4% |
| EV/EBITDA | 66.8x | 30.2x | 20.0x |
AO World
AO World, which floated in February, has been around since 2000, and is the UK’s leading online retailer of white goods. It’s a tough market. The company could feel an increasing squeeze from bigger and more established names, such as Currys, John Lewis and Argos, while barriers to new online-only entrants are not insurmountable.
The intensely competitive market place is reflected in AO World’s low EBITDA margin of 3.5%. At this margin, the company has to increase revenue by £29m to add £1m to EBITDA. Boohoo can do the same on an £8m increase in revenue; Zoopla on an increase of just £2m.
There’s little leeway for mistakes in low margin businesses at the best of times, but AO World’s growth strategy of expanding into new product categories (TVs , for example) and new geographical markets (beginning with Germany) presents additional execution risks.
The company’s shares may be lower now than at the IPO, but an EV/EBITDA rating of 66.8 looks way too high to me.
Boohoo
Own-brand fashion etailer Boohoo floated in March. The company was founded in 2006 by a team that previously supplied the likes of Primark and New Look.
Boohoo focuses on the 16-24 age group and bills itself as “The Global Fashion Leader for a Social Generation”. Revenue and Twitter follower numbers are instructive: Boohoo (revenue £0.5bn/Twitter followers 364k), New Look (£1.5bn/213k) and Primark (£5bn/72k). Boohoo is also driving brand community and loyalty through social media platforms Facebook, YouTube, Snapchat and Tunepics.
While fashion is more fickle than AO World’s business, Boohoo is delivering higher margins and is already getting a third of its revenues from outside of the UK. Boohoo’s EV/EBITDA is still pretty rich at 30.2, but is less than half that of AO World.
Zoopla
Online property portal Zoopla, which was floated in June, and larger rival Rightmove have managed to see off attempts to encroach on their space by such formidable companies as Google and Tesco. Having pretty much cornered the online market, Zoopla and Rightmove have terrific margins.
There’ll be a fresh challenge in January when Agents’ Mutual launches a new portal “at prices well below those being charged by the two existing major portal groups”, but restricting agentsto listing properties on only one other property portal website.
Agents’ Mutual acknowledges that “entering a market where the incumbents have such power is a big challenge”, and Zoopla’s boss has pretty much brushed off the threat, saying: “The majority of estate agents are not participating in Agents’ Mutual”, and adding that the one-other-website policy “makes it harder for an agent that participates in it to be as competitive as those that don’t”.
With high margins in an industry segment dominated by two (or potentially three) major players, Zoopla, on and EV/EBITDA of 20, looks more attractive to me than either AO World or Boohoo.
