New crop of idealistic IPOs could change the world
Big Data

New crop of idealistic IPOs could change the world

Uber (UBER) raised $8.1 billion last week, the biggest U.S. Initial Public Offering in five years. But it is only the headliner in a bunch of IPOs dropping this month. Others span the spectrum of new-age technology firms …

  • Parsons (PSN), for example, is using data science to build smarter defense infrastructure. Its deal was recently priced at $500 million.
  • A trio of $75 million deals — Cortexyme (CRTX), NextCure (NXTC) and Axcella Health (AXLA) — are set to discover breakthrough drugs for Alzheimer’s, cancer and metabolic disfunction.

Critics point to these valuations and say bankers have lost their minds.

Last week was the worst five-day stretch of the year in the markets. The S&P 500 was down about 2%, while the Nasdaq notched a 3.2% decline. However, that is not doing anything to slow the arrival of 12 new Initial Public Offerings, including Uber Technologies (UBER).

It’s a weird coincidence. Incidents of serendipity that involve market weakness and a rash of IPOs always lead to bigger debates about valuations. But are stocks really too expensive?

The simple answer is no, not even close. Today’s valuations are nearly two decades in the making.

Wall Street investment bankers have been building up to this for a while. American entrepreneurs are leading the world in technological innovation.

Armed with powerful pay-as-you-go cloud computing infrastructure, ample venture seed money and data science, software engineers are reimagining commerce, sector by sector …

From transportation and hospitality, to communications and drug discovery, they are building dominant new platforms that remove friction, increase productivity and bring better outcomes.

The Wall Street Journal reported in October that the Uber IPO might fetch as much as $120 billion, an immense sum for an unprofitable ride-hailing business valued at only $65 billion 2 years ago.

To put the valuation in perspective, the bankers believed Uber was more valuable than Ford (F), General Motors (GM) and FiatChrysler, combined.

Uber raised a moderate $8.1 billion last week, the biggest U.S. debut in five years. But it is only the headliner in a bunch of IPOs dropping this month. Others span the spectrum of new-age technology firms …

  • Parsons (PSN), for example, is using data science to build smarter defense infrastructure. Its deal was recently priced at $500 million.
  • A trio of $75 million deals — Cortexyme (CRTX), NextCure (NXTC) and Axcella Health (AXLA) — are set to discover breakthrough drugs for Alzheimer’s, cancer and metabolic disfunction.

Critics point to these valuations and say bankers have lost their minds. But I believe something more important is at work.

Data makes disruptive new business models possible. Large enterprises and venture capitalists could see it coming long ago. Bankers are merely cashing in.


 

Even as stocks were plunging last Tuesday, Cruise Automation, an autonomous vehicle startup backed by General Motors (GM), was securing new funding from T. Rowe Price (TROW), Honda and Softbank, the giant Japanese venture capital fund that famously seeded Yahoo! in the 1990s.

The $1.15 billion Cruise investment values the San Francisco company at $19 billion, roughly one-third the value of GM.

What all these investors see is something Bill Gates, the founder of Microsoft, foresaw way back in 2004 …

At the time, the internet bubble had burst. Good jobs for software engineers were hard to come by. Speaking to a group of disheartened computer science students in the basement of a Harvard conference center, Gates said computer science was on the cusp of machine-to-machine learning. He reckoned this breakthroughwas worth 10 Microsofts.

Today, Alphabet (GOOGL), Amazon.com (AMZN), and Microsoft (MSFT) are building new businesses models around democratizing machine learning and artificial intelligence. The wealth being created by innovative startups is only beginning.

Guardant Health (GH) is one of those businesses …

This California company uses cutting edge big data, machine learning and genomic sequencing techniques to help clinicians diagnose cancer cheaper and more effectively. Ultimately, the goal is to develop a simple blood test for cancer.

The company had a hotly anticipated IPO last October. It proved to be a humdinger. Even after bankers bumped the initial offing price to $19, from a range of $15 to $17, shares still jumped 70% on the first trading day.


 

Prior to its IPO, the Guardant had seven funding rounds. It raised $550 million from the likes of Softbank, Sequoia Capital, T. Rowe Price, Khosla Ventures and Lightspeed Venture Partners.

Guardant’s attraction was a liquid biopsy that allows oncologists to see all the genomic information of a patient’s tumor with a simple blood test. The alternative is a tissue biopsy, which can be expensive and risky because a piece of the physical tumor is required.

In an October 2018 interview with CNBC, Helmy Eltoukhy, chief executive officer, claimed a lung cancer biopsy costs $14,000, and has a complication rate of 19%. The same information can be gleaned from a Guardant test with only two teaspoons of blood.

Low cost and convenience mean the test can be performed frequently to track how the tumor is mutating with medication and treatment.

Guardant’s secret is applying digital communication algorithms to the process of DNA sequencing. Whereas tissue biopsies look at the tumor only, this process reveals the entire genome. It also means the science works across all cancers.

The company asserts its machine learning, coupled with big data analytics, leads to a 1,000x error rate reduction.

It’s the kind of crazy progression Bill Gates foresaw almost two decades ago in that Harvard basement. And it is going to create a tremendous amount of wealth for stakeholders.

The current stock market weakness has investors focused on valuations. They’re wrong to bet the current stable of new issues are priced too high. The promise is the advent of business models and uses cases we can’t yet imagine.

Guardant soared as high as $108 before falling back into the $70 range. The company isn’t profitable, and sales are currently $90 million. However, if managers do successfully build a blood test for cancer, its current valuation is woefully inadequate.

My Tech Trend Trader subscribers are sitting on a 77% gain in Guardant. To be among the first to get my recommendations on everything from shiny new IPOs to other disruptors with bright futures, click here.

Best wishes,
Jon D. Markman

P.S. I’ll be speaking at the Las Vegas Money Show on Wednesday. I hope to see you there. If you can’t make it, you can catch me at the next show at the Hyatt Regency in Seattle, June 15-16. Check out the agenda, and let the organizers know you’re coming, here.

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Comments 1

Paul May 13, 2019

I liked the Parsons IPO on opening day (which was different for me, I generally don’t invest in IPOs)_…Keeping some cash on the sidelines to buy more if there is a significant dip (but not really expecting one…). I like the businesses they are in, and the IPO $$ are going to debt reduction…

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