The brief lull in the U.S. IPO market is coming to an end and we have two major listings this week. Nubank, the Brazilian fintech company backed by Berkshire Hathaway, has priced the IPO at the top end of the range. Cloud software company HashiCorp has also priced the IPO and will start trading on Dec. 9 under the ticker symbol “HCP.” What’s the forecast for HashiCorp stock and is it a good long-term buy?
HashiCorp competes with cloud giants like Amazon and Microsoft. The cloud industry is witnessing strong secular growth. For Amazon, the cloud business has been the literal cash cow and has been the most profitable business vertical. Andy Jassy, who was heading the cloud business, succeeded Jeff Bezos as Amazon's CEO.
HashiCorp priced the IPO above the expected range.
While Nu Holdings had to lower the IPO price range during the listing process, HashiCorp raised the IPO price. It was previously seeking to price the IPO between $68 and $72. Eventually, HashiCorp priced the IPO at $80. Goldman Sachs, Morgan Stanley, and JPMorgan Chase acted as the lead underwriters for the issue
There's a strong appetite among investors for software companies, especially those that are in the cloud business. In 2020, cloud company Snowflake became the largest software IPO ever. The company increased the IPO price multiple times during the listing process and yet the stock soared on listing.
Even Berkshire Hathaway co-invested in the IPO along with Salesforce. Warren Buffett’s disdain for IPOs and tendency to stay away from tech companies isn't secret. While the Snowflake investment might have been made by a different manager at Berkshire, it shows the kind of interest that cloud companies are attracting.
HashiCorp stock looks richly priced.
At the IPO price of $80, HashiCorp would have an initial market cap of $14 billion. The fully diluted market cap after accounting for potentially dilutive securities like stock options and warrants would be around $16 billion.
HashiCorp has a strong revenue retention rate, which looks encouraging. Markets give a premium valuation to companies with a high share of recurring revenues. Its open-source downloads as of January 31, 2021, were almost 100 million. The company had over 2,100 total customers as of July 31 out of which more than 550 have an ARR (annual recurring revenue) of more than $100,000.
Is HCP stock a good long-term investment?
HashiCorp generated revenues of $259 million in the TTM (trailing 12-month) period ended July 31. Based on the fully diluted market cap, this implies a TTM price-to-sales multiple of 61.8x. The multiples look rich, and HCP would be among the most highly valued tech companies.
To put things in perspective, the valuation that HCP has sought in the IPO is thrice of its most recent private market valuation. Companies including Snowflake and Affirm were valued at a steep premium over their private market valuation and yet delivered good listing gains.
HashiCorp does look like a good long-term investment and might see a listing pop considering the euphoria. However, it might be prudent to wait on the sidelines for now before entering into the stock.