Bill.com's Successful IPO

In this episode of MarketFoolery, Mac Greer talks with analyst Ron Gross about some recent market updates. lululemon athletica (LULU -0.43%) is down around 4% on earnings. Ron explains a few reasons why that seems a little unfair to the yoga wear retailer. In happier news, Bill.com went public to great fanfare, pricing well above its range. Ron and Mac explain what this company does, and what pricing above or below the range means for a new IPO. Then, they look back on what 2019 has actually meant for the IPO market -- Beyond Meat, Uber, Lyft, and and the rest. The results might surprise you. Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center . To get started investing, check out our quick-start guide to investing in stocks . A full transcript follows the video.

This video was recorded on Dec. 12, 2019.

Mac Greer: It's Thursday, December 12th. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by the one, the only, Motley Fool analyst Ron Gross. Ron, it is just you and me.

Ron Gross: That's all we need, Mac. We're good. We got this.

Greer: That is all we need. Let's hope that the sum is greater than the parts. I mean, the parts are impressive, but let's go for a sum that's even greater.

Gross: That's a lot of math we've got to get done here.

Greer: Well, Ron speaking of math, we have a new IPO. And yes, Ron, it involves a company automating and digitizing financial operations for small and mid-sized business.

Gross: That sounds important.

Greer: And we will also talk about some of the year's other IPOs -- the hot and the not-so-hot. But we begin with Lululemon, the maker of yoga wear and other athletic apparel. Shares down around 4% today at the time of our taping. Ron, that surprised me, because they post better than expected earnings, and same-store sales up 17% for the quarter. But, concerns over the fourth quarter outlook.

Gross: Yeah, this is a very strong report in and of itself. Investors are focusing on their guidance for the holiday season, that's weaker than folks had hoped for. I think there's a little bit of a misunderstanding here because last year's quarter actually had an extra week, so the comparisons look a little bit worse than they will actually be if you compare apples to apples rather than apples to weeks. But, still, when you have a stock that's done this well -- 80% increase just this year alone -- priced pretty high relative to other specialty retailers, you have to do everything right or the stock's going to get hit a little bit.

But, looking just at the quarter, still very, very impressive, as you noted. Revenue up 23% with comp sales up 17%. Comp store sales, just for the stores, up 10%. Direct-to-consumer up 29%. That's 27% of sales now, so they're doing a nice job of increasing that over time. Margins were up a bit, and that led to an earnings per share increase of 28%. It's a very, very strong report. Eight straight quarters of double-digit growth in comp sales. You can't fault them. They're executing quite well.

Greer: OK. I hear you on all that, Ron. But I want to go back to what you were saying about the calendar. Essentially, you're saying, some of these analysts who are following this company can't do math, or they haven't done the math?

Gross: I saw one analyst point it out, which was great. Some of the other analysts notes, I did not see mention of it. It's hard to say why a stock sells off. Is that because of analysts? Is that because of retail investors? Funds? Again, this stock is priced kind of to perfection here, so any kind of weakness or perceived weakness sometimes leads people to take money off of the table. That's typically not how we invest as Fools. We invest for long periods of time, and we don't let little blips here and there get us too bent out of shape. But we are trading, I want to say it's around 45X, 46X times 2019 guidance. And for a yoga pants retailer, that's a big number.

Greer: And other athletic apparel.

Gross: [laughs] Yes, that's the important part.

Greer: Let's talk a bit more about that. As you mentioned, the stock has been on fire. Almost a double over the last year. By comparison, Nike up around 30% over the last year. Not shabby. But Lululemon crushing Nike. Lululemon up 4X in value over the past five years. Nike has doubled over that same time. So, it has been a monster.

Gross: Yeah. They're very different companies. Business models are similar, but quite different. Lulu really is a specialty retailer, and Nike does a lot more things, selling into a lot more distribution channels. But it's fine if we want to use them as comparisons. Nike, obviously, a much, much bigger company. It's been around for a much longer period of time. It's more mature. It doesn't have growth like the growth rates we see Lulu putting up. And you can see it in the multiples. You can see Nike trading around 30X, which is still a relatively big number. Higher than the market's multiple. But the growth is just not there. You can look across Nike's income statement and look at their operating income, and it's pretty much around $4.5 billion, give or take a little bit each year. Single-digit growth here, single-digit growth there. I own it. It's a great company. But it's not going to be putting up 20%, 30% growth numbers.

Greer: OK. One of the storylines on Lululemon was, they have a growing men's business. Ron, are you a potential customer? Have you done yoga? Do you do yoga?

Gross: My wife does yoga, I want to say, pretty much every day. She begs me to join her. And I so far have declined. But I definitely could benefit from it. I don't know if I would choose to buy $100 yoga pants as a test.

Greer: Seems pricey.

Gross: I think I would dip my toe in the water with something a little cheaper. But, I was pretty skeptical when Lulu introduced menswear. If we went back and listened to the tape, I'm sure I said some snarky things there. But I was wrong. It's doing pretty well. The traction they've received is impressive, and it's becoming a nice part of that business. But I won't be a customer anytime soon.

Greer: OK, well, I've started doing a little yoga, as part of our Fool fitness here.

Gross: Nice!

Greer: It is nice. I'm really strong with the child's pose. You're basically just kind of collapsed in a puddle on the floor, and that's great. But then, when it turns to downward dog, and especially the pigeon, [groans] the pigeon is a crusher.

Greer: There's one move where you just lie on your back and kind of close your eyes and fall asleep. I'm really good at that one.

Greer: Oh, that's good. The child's pose isn't quite like that, but I kind of do the child's pose already. I mean, the only thing missing is a beer. But, you can't have it all.

Gross: As someone who cannot touch their toes, I could definitely benefit from yoga.

Greer: I could benefit, too.

Gross: I haven't gotten there yet.

Greer: I want to bring Dan Boyd, our producer, in. Dan Boyd, do you do yoga? And if you're not a Lululemon shopper, what would it take to get you into a Lululemon store?

Dan Boyd: I do not do yoga. The one time I tried yoga, I threw my back out the very next day, so I've been hesitant to go back. What would get me into a Lululemon store? Probably a sale, a good sale. I don't really know what they have to offer for men, though. I'm not about to go get some leggings. That's not me.

Greer: You feel like that time has passed you by?

Boyd: Maybe if they have some nice shorts, perhaps. That could be good. But I don't know what their offerings are for men.

Gross: You could go in and buy a gift for your wife.

Boyd: I try to keep my gifts from my wife non-clothing-related. I feel that there are a lot of pitfalls involved in buying clothing for your significant other.

Greer: You are smart man. As we wrap this up, I guess the key question that I always ask is, what does Lululemon have that Costco doesn't? If you can answer that --

Gross: A high price point! And the quality is pretty good, too.

Greer: Details. Come on, you can't have it all.

OK, let's move on to the IPO market. We have a new IPO on the scene. bill.com making its debut today, Ron. Now, as I mentioned in the open, bill.com is a provider of cloud-based software that automates back-office operations for midsize and small businesses.

Ron, bill.com's IPO priced above the range. What does that mean?

Gross: When investment bankers go around and shop a new public offering, they set a valuation of what they think they can sell the stock to the public at. The range in this particular case was $16 to $18 per share. As they go around and shop it and do their road show and talk to institutional investors, they get a gauge on what the demand looks like relative to the supply of stock that they have to offer. And if it appears that there's a really big appetite, just like with anything supply and demand related, you can actually raise the price.

In this case, they did. Instead of $16 to $18 range, they actually raised the price to $22 per share, which is where they'll go public at when it starts trading. In addition to that, instead of offering 8.8 million shares to the public, they decided they could increase it by a million shares to 9.8 million. So, not only a higher price, but more stock offered to the public as well. So, they were able to raise $216 million versus their original thought of raising only $150 million. We'll see how the stock trades, not only on its first couple days of trading, but over time as well. But just from a money raised perspective, this was a successful IPO.

Greer: In talking about how the stock trades, if you're the company that first day, you want the stock to go up a bit. You want to get some kind of positive buzz. But you don't want it to go up too much, because that means that it was mispriced and you left money on the table.

Gross: Yeah, theoretically, if you see at stock jump 20%, 30%, even more we've seen sometimes, you say, "Well, gosh, looks like I could have sold the stock at a much higher price in that IPO, and we left a bunch of money off the table." And you call up your investment bankers and you say, "What the heck happened here? How did we misread the market to this extent?" Investment bankers want to get the deal done. They want to make sure it's robust. They want to make sure the stock is supported in the marketplace, because you don't want the price to go lower than your IPO. That looks bad, and it's really considered to be an unsuccessful IPO if that happens. It's tough to accurately gauge the supply and demand characteristics. But if you're really far off, it appears that a little bit of a mistake might have been made.

Greer: Ron, let's pull the lens back a bit and talk about the IPO market this year in general. Some of the higher-profile IPOs, well, they've been some doggy IPOs. We've got Uber, Lyft, Slack, SmileDirect, all trading below their IPO price. They all IPO-ed this year. On the other hand, you have Beyond Meat, and you have some successful IPOs.

Gross: Yeah, the first half of the year was a little bit more successful, I feel, than the second half. I think some fatigue set in. Perhaps some companies went public that maybe shouldn't have. We saw WeWork actually have to pull their IPO when cooler heads prevailed a bit. But, overall, there have been some pretty successful IPOs in 2019. The Renaissance IPO ETF is actually up 30% this year, which is beating the market as a whole, which we may not think would be the case when you think about Lyft or Uber or SmileDirect, even companies like Peloton, Revolve, or Levi Strauss, which are basically unchanged, give or take a dollar here or there, from their IPO price. But, as you said, when you get into Beyond Meat, which is tripled; Zoom, which has doubled; a couple of biotech pharmaceutical type companies that have doubled, and in one case, tripled; you start to see that maybe the IPO market isn't as bad as the perception.

Greer: As we wrap this up, Ron, and we look at bill.com, or we look at any new IPO, do you have any rules that you follow, any general guidelines for how to invest, how to approach an IPO?

Gross: Well, I typically don't like to invest in an actual IPO. I like the company to come public, get its feet wet a bit. I like to follow it, see how things are evolving, and then make a decision. But I would, in general, evaluate an IPO just like I would any company, based on revenues, profits and cash flow, and potential growth rate. It's interesting, this bill.com IPO, it's a pretty successful company. A lot of great customers, a lot of great partners. Only $108 million in revenue, and not profitable yet, although they're getting close. I'm a guy who likes profits and cash flow. If I think that they're going to build and grow into profits and cash flow to not only support the current valuation, but allow for the stock to go up in the future, then that would be the kind of thing that would interest me.

Greer: And I like the name. Straightforward. I'm a straightforward guy. Let me know what you're doing.

Gross: The founder's name is Bill. No, I'm just kidding.

Greer: [laughs] Wow, I love that. And they decided william.com, just to make any sense. It's a free show, people.

OK, so, the desert island question. You're on a desert island and you've got to invest in one of these stocks for the next five years. Let's go Lululemon, bill.com, and let's throw in some other IPOs -- Uber Lyft, SmileDirect.

Gross: Oh, boy! Yeah, that's not an easy one.

Greer: I'm surprised you're hesitating. I thought you were going to go Lulu right off the bat.

Gross: I don't like 46X for a specialty retailer in any way, shape, or form, to be honest with you. But bill.com is too new. Lyft and Uber's business models trouble me. SmileDirect is a dud. So, I think you're right. I do have to go Lulu.

Greer: Would you say Lululemon's valuation is a stretch?

Gross: [laughs] It is a bit of a stretch!

Greer: Our email address is [email protected]. Dan Boyd is just nodding disapprovingly.

Gross: As well he should!

Boyd: I don't know why we let you do this after jokes like that. I really don't.

Greer: [laughs] What joke? I'm just talking about stretch goals, rich valuations. Come on, come on!

I apologize.

Boyd: Would you say that the valuation of Lululemon, Ron, has some stretch marks?

Greer: Nice!

Gross: I gotta get out of here.

Greer: That's tough, sorry.

Gross: [laughs] Always a pleasure, Mac!

Greer: Thanks, Ron! As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening and we will see you next time.