The Limitations of One-Brand IPOs
Investors' interest has recently been piqued by high growth initial public offerings. Recently, companies whose revenue has been accumulated primarily from one main product are "going public" in order to acquire capital for expansion. For instance, GoPro (GPRO), the company behind the trending line of tiny, waterproof video cameras, had their IPO on NASDAQ on June 26, 2014, while Amplify Snack Brands, Inc. (BETR), a high growth snack company known for their popular product SkinnyPop, had theirs on the New York Stock Exchange on August 5, 2015. Both companies attribute their success primarily to the branding of a one key product line.
As changes in their stock prices since the time of their IPOs reflect, however, one highly popular brand isn’t always a sufficient reason to leave the private market. Opening at a share price of $18.00 on August 5th, Amplify Snack Brand’s shares took a hit even on the first day of selling, trading down over 8% at $16.55 per share by mid-day. As John Kell explained in Fortune that day, this drop was unusual given that the average first-day gain of consumer food IPOs in the past five years has been 22% (as reported by Renaissance Capital). Despite Amplify Snack Brands’s attempts to diversify by purchasing a small-cap tortilla chip company, Paqui, for $12 million in April 2015, this move has not done enough to ensure positive growth in the company’s share prices.
Amplify has focused its branding on the idea of “Better-For-You” snacks, which goes along with the widespread consumer preference for “healthy” nibbles and explains why SkinnyPop is so popular. How is SkinnyPop so profitable, while Amplify’s share price has plunged down as low as $10.00, and is currently hovering at around $12.00? As explained in a recent article for Seeking Alpha, the company did not make a profit on the IPO because all public shares offered came from selling shareholders, it has assumed nearly $200 million in debt, and has only $17 million in cash, which is not enough to conduct acquisitions in the near future. In addition, SkinnyPop has numerous competitors selling similar products at comparable prices. Thus, as Richard Pearson reports in Seeking Alpha, numerous analysts, including himself, are choosing to short BETR.
By comparison, GoPro went public at a share price of $24.00 and was trading at $27.60 as of closing time on October 9th. The company plans to start selling drones in 2016, which will boost the company’s earnings in the short term, but will this be enough to maintain GoPro’s market share? A recent Seeking Alpha article discussed how GoPro has never fallen short of their predicted estimates for quarterly results, and there is reason to believe that they will continue to maintain this reliability. While it is difficult to make comparisons between Amplify and GoPro given their involvement in very different industries, it appears that GoPro is a stronger company within its sphere and has more opportunities for diversification. For this reason, even though GoPro shares have dropped from nearly $90 to $27 over the past year, Seeking Alpha writers, such as Josh Arnold, remain confident that this company has substantial upside.
Ultimately, it is difficult to predict how well companies whose profit is primarily driven by one product line will do when they go public. As Amplify Snack Brands and GoPro show, this wide range of potential outcomes is what draws the interest of investors, allowing them to weigh in with their own insights. As many startups can attract attention and success from one good idea, it is interesting to track which are able to continue to innovate, and which fade from the spotlight.