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IPOs or initial public offerings have always excited investors. It is the process of offering shares of a private corporation to the public in a new stock issuance. Before an IPO, a company is private with limited shareholders including the founders and some private investors. In other words, a typical stock investor cannot buy stocks of a private company. But once a company decides to go public and lists on an exchange, any investor can buy its stocks.
To understand how an IPO works, consider that you have a very successful business in your city and you are looking to expand your business throughout the country. To do so, you decide to issue shares of your company to raise enough cash for inventory, marketing, staff, etc. Generally, a company issues an IPO to support its expansion and growth efforts. This means it provides investors an opportunity to invest in a company that is eyeing rapid expansion. Growth stocks are able to generate massive wealth over the long-term and IPO investors can get in on the ground-floor of this growth.
For example, if you would have invested $1,000 in Shopify stock, you would have returned a staggering $55,000 in just over five years. Investing in an IPO does come with a certain amount of risk. As an investor, it is up to you how much risk you are willing to take. According to Investopedia, you can consider certain factors before investing in an IPO:
Search for information on the company, its competitors, overall industry, and press releases. This will give you an overview of the health of the company.
Look for a company that has strong underwriters. In general, quality brokers bring quality brokerages.
Be cautious and read the prospectus. It lays out the risks, opportunities and proposed uses of the money raised from the IPO.
A publicly traded company shows that it has been able to meet the federal regulations required to be publicly traded, giving investors a sense of stability. Investors generally invest in an IPO treating them as long-term investments.
Keeping everything in mind, here are three of the best Canadian IPO stocks that every investor should watch out in the next decade:
Lightspeed has more than doubled since its IPO
Lightspeed (TSX:LSPD) stock is currently trading at $40.2 per share. It went public in March 2019 at $16 which means it has already doubled your investment in 18 months. However, these gains have been volatile.
LSPD stock rose to a record high of $49.5 last August before falling to $10.5 in March 2020. While the coronavirus-led bear market decimated the stock, LSPD’s recovery was just as swift. It m
Lightspeed is one of the top growth stocks on the TSX. It provides software, solutions and support systems to small and medium size retailers and restaurants. LSPD’s cloud-based platform helps SME’s manage operations, accept payments, improve customer engagement and grow their business.
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Analysts expect Lightspeed to grow sales by 37% year-over-year to $165.3 million in fiscal 2021 and by 40% year-over-year to $231.8 million in fiscal 2022. While it is still unprofitable, LSPD’s easily scalable platform, expanding product portfolio and focus on customer acquisition will help drive top-line growth in the upcoming decade.
Docebo stock has been on a tear since its IPO
Docebo (TSX:DCBO) is another stock that you should keep an eye on if you want to grow wealth in the long run. The company provides e-learning solutions to enterprises and similar to LSPD, has focused on customer acquisition and retention to grow top-line.
Docebo stock IPO’ed at $16 per share and touched a record high of $58.83. However, it has recently lost momentum and is currently trading at $42.75. They reported its Q2 sales which were up by an overwhelming 46.5% year over year at US$14.5 million. The company is growing at a faster pace than the overall market and it is well poised to outpace technology peers over the long term.
Docebo caters to many companies across technology and media, consulting and manufacturing sectors. It has a subscription-based business model that will ensure recurring sales across business cycles. Further, the growing demand for enterprise learning can continue to fuel growth in the stock.
Analysts tracking Docebo expect sales to grow by 49.7% in 2020 and 45.69% in 2021. Comparatively, its earnings loss per share is expected to narrow from $0.49 in 2019 to $0.09 in 2021.
Dye and Durham
Dye & Durham (TSX:DND) listed on TSX on July 17 and has performed exceptionally ever since. The stock was listed at a price of $7.50 and is currently trading higher by 200% at $23.
The company has grown revenue at a compounded annual growth rate of 76% over the last three years and this growth is forecast at 48% for 2020. DND has a strong customer retention rate with more than 25,000 active clients and it has made 14 acquisitions since 2013. This has boosted the overall growth of the company.
Dye & Durham’s customer base is well diversified and includes blue-chip law firms, financial corporations and governments.
Growth stocks trade at a premium due to their expected returns. LSPD, Docebo and DND have forward price to sales multiples of 26x, 20.1x and 14.6x respectively. This means they will be vulnerable in a broader market sell-off.
However, their ability to generate market-beating returns over the long-term suggests every major correction in the stock price provides an opportunity to buy the stocks at a lower valuation.
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