2020, the pandemic year, saw a digital revolution, as the lockdown put the entire world on the internet. There was an e-commerce boom, digital payments boom, crypto boom, and video calling boom. Two tech companies took advantage of this optimism and launched their initial public offering (IPOs) in mid-2020. If you’d invested in these IPOs, your money has more than doubled in fewer than 18 months.
here are the two successful tech IPOs of 2020:
- Dye & Durham (TSX:DND): 218%
- Nuvei (TSX:NVEI)(NASDAQ:NVEI): 68%
If you’d invested $2,000 in each of the two tech stocks, you would now have more than $7,700 in your portfolio.
The risks of investing in IPOs
The biggest advantage of investing in IPO is extraordinary gains. But then again, not all IPOs are successful. And for a beginner, it is difficult to make a calculated guess as to which IPO has a higher chance of success. IPOs are risky, because you don’t have much data regarding the company’s historical performance.
Then there is a risk of inflated numbers, and over-optimistic projections of future growth as tech is scalable. Take, for example, Facedrive. It launched its IPO in 2019 as a ride-sharing company and, in two years, turned into a food-delivery service. In these two years, it lost 51% of its value.
So, how do you differentiate a good IPO from a not-so-good IPO? Read the prospectus, do your due diligence regarding the business model, map industry trends, look at the management’s background, and conduct competitive analysis.
All this can help you improve your chances of investing in a good IPO with a high success rate. But always keep room for uncertainty, especially for things beyond the control of the company’s management. After all, an IPO is a means of investing in the business, and every business has its ups and downs, especially when it’s starting up.
Behind the Dye & Durham IPO’s success
Dye & Durham offers cloud-based information services and workflow solutions to the niche market of legal, government, and financial services firms. The critical nature of its service makes the software sticky, with an average contract term of 16.6 years for the top 100 accounts. The company’s strategy is to grow through acquisitions that are immediately accretive to earnings. This is a strong business model that may give good returns initially and then normalized returns in the long term.
As Dye & Durham works in a niche market, it is not worried about too much competition. The company also showed strength when it rejected a buyout offer to take the company private. Dye & Durham continued to pursue its existing business strategy of growing through acquisitions, as it believes this strategy can give value to shareholders. The company’s efficient execution of all acquisitions makes it a stock to buy and hold forever.
The stock’s resilience was visible in December when the global markets crashed. The TSX Composite index was down 2.5%, but Dye & Durham stock surged 13.5%.
Behind Nuvei’s success and downside
Payment-processing firm Nuvei was another tech stock that debuted in 2020 when the digital enthusiasm was at its peak. Nuvei launched its IPO in September 2020 and completed the year with 272% returns. This growth was driven by e-commerce enthusiasm, as all stores started accepting digital payments to abide by the social-distancing norms. Nuvei’s adjusted EBITDA increased by 97% year over year in the third quarter.
While Nuvei is seeing most of its growth from e-commerce, it is targeting verticals like gaming, financial services, digital goods, and travel as well. The company charges high fees, but it enjoys strong gross merchandise value (GMV), making it a good bet for the medium term. Nuvei also added +40 cryptocurrencies to its modes of payments, preparing itself for a possible crypto revolution.
But then came the short-seller Spruce Point Management’s report on December 8, and the stock lost 40% of its value. The report highlighted Nuvei CEO Philip Fayer’s past, stating evidence of how he falsified his education credentials and was involved in frauds. These are some serious allegations. If proven right, these allegations could push Nuvei into a long-term downtrend. Shareholders could ask for a management reshuffle.
You can sell some of Nuvei’s shares and safeguard that money in a company with strong management and invest again when this matter fades.
