Should You Take a Bite and Buy Krispy Kreme (DNUT) IPO Stock?

The U.S. IPO market is gaining traction and 17 companies are expected to go public this week. The second quarter of 2021 has been the busiest week for IPOs since 2000. Krispy Kreme is one of the companies that's expected to list this week. Should you buy Krispy Kreme stock in the IPO or give it a miss?

This is Krispy Kreme’s second stint at public markets. It was a listed company before JAB Holdings took it private in 2016. Krispy Kreme isn't the only company that's aiming to go public again. Over the last year, companies like Petco, McAfee, and Leslie’s Swimming Pool Supplies have gone public for the second time.

Krispy Kreme is expected to IPO on July 1. The company has kept the IPO price range between $21 and $24 and plans to sell around 26.7 million shares. JP Morgan, BofA Securities, Morgan Stanley, and Citigroup are the lead book-runners for the IPO. The underwriters have an option to buy another 4 million shares.

Usually, companies specify the use of funds in the IPO, which can be debt extinguishment, organic growth, or acquisitions. However, Krispy Kreme hasn’t listed how it plans to use the funds. “At this time, we have not specifically identified a large single use for which we intend to use the entirety of the net proceeds,” it said in the S1 filing.

Krispy Kreme will trade under the ticker symbol “DNUT” on Nasdaq. In the previous listing in 2000, the company listed on the NYSE under the ticker symbol “KKD” until it went private in 2016.

At the midpoint of the IPO price range, Krispy Kreme will seek a valuation of $3.8 billion and raise $600 million. When the company was acquired by JAB Holdings in 2016, it was valued at $1.35 billion. The current valuations are almost three times the levels at which it went private. Is the near three-fold rise in Krispy Kreme’s valuation justified?

Krispy Kream reported revenues of $1.12 billion in 2020 compared to $557 million in 2016. During that period, the company’s revenues have increased at a CAGR of 19.1 percent, while in absolute terms the rise has been just above 100 percent.

In 2020, Krispy Kreme posted an adjusted EBITDA of $152.8 million, while it posted a net loss of $60.9 million. After accounting for one-time expenses, it posted an adjusted net profit of $47.9 million in 2020. The numbers imply a 2020 price-to-sales multiple of 3.4x and an adjusted PE multiple of 24.8x.

The valuation multiples seem reasonable looking at the strong double-digit topline growth. While the valuation multiples are above the 2016 acquisition multiples, the company’s revenues have also doubled over the period while there has been a rerating of multiples across the board. Overall, the IPO looks fairly valued.

Krispy Kreme's stock forecast looks reasonably positive especially given the recent optimism about new listings. The stock might see some listing gains but don’t expect wonders as the valuations don’t leave much on the table for investors.