DB2
Topic: Research a publicly traded company that recently (within the past three
years) went IPO (initial public offering). Discuss the estimation of the
company’s stock price prior to the actual IPO date, the price of the stock
on the date of IPO, the price shortly after, and the current price.
Reflecting on what has been learned so far, discuss whether you believe
the initial estimation of value was accurate and why or why not. Do not
use first or second person when discussing one’s opinion. Rather, continue to
write in third person.
Chewy, Inc. IPO and Valuation Discussion
Jason D. Roseberry
Liberty University
BUSI 534: Business Valuations
Dr. Richard Fendler
September 18, 2020
Chewy, Inc. IPO and Valuation Discussion
Chewy, Inc. (“CHWY”), founded in 2011, is an online retailer of pet products offering
more than 45,000 items and prescriptions with a focus on fast delivery and exceptional service
(Chewy Corporate Overview, 2020). Chewy’s IPO date was June 14, 2019, with an IPO price of
$22.00 per share resulting in an IPO valuation of $8.8 billion (Wilhelm & Kunthara, 2019).
Despite Chewy’s large revenue, which was more than $3.5 billion for fiscal year 2018, the
company has yet to show a profit and had posted a loss of nearly $229 million for fiscal year
2018 (SEC Chewy S-1, 2019). Despite the lack of profitability, the company’s stock has
performed well and the share price has risen during its short time in the public market.
Pre-IPO Estimate
Chewy’s IPO listed the offer as 46.5 million shares at a price of $22.00 per share, which
had been increased from the initial $17.00 per share target (Kilgore, 2019; SEC Chewy S-1MEF,
2019). Chewy had previously been acquired for $3.35 billion in 2017 by PetSmart, or roughly
1.6-times the company’s fiscal year 2017 revenue, and the IPO valuation was $8.8 billion, or
more than 2.5-times the company’s fiscal year 2018 revenue (Del Rey, 2017; Kilgore, 2019;
Wilhelm & Kunthara, 2019). Assuming the same number of shares outstanding in the 2017
acquisition as used in the IPO valuation calculation, the estimated share price at the time of
acquisition in 2017 would have been approximately $8.38.
IPO Stock Price
Though the IPO was priced at $22.00 per share, the stock’s first trade was at $36.00 per
share for a premium of 64% to the offering price (Kilgore, 2019). The stock ended the first day
of trading at $34.99 per share for a 59% premium above the IPO price and totaling an enterprise
value of nearly $14 billion (Kilgore, 2019).
Post-IPO Stock Price
Chewy’s stock for the first 90-days post-IPO remained relatively constant in the low-to-
mid $30.00 per share range, but ended September 29, 2019, at $25.86 per share (Yahoo! Finance,
2020). The reasoning for the drop in share price could be attributed to additional shares coming
to market from PetSmart or other insiders, as well as a market correction to adjust for a minority
discount as the preferred Class B shares, which held over 90% of the voting rights, were still
controlled by PetSmart. The drop in share price could also be easily attributed to investor
excitement cooling off after the strong IPO.
Current Stock Price
As of Friday, September 18, 2020, Chewy closed at $53.00 per share giving the company
an enterprise value of $22.24 billion, which is nearly double the enterprise value at the close of
the first day of trading, despite the company still posting a loss off of $5.9 billion in trailing
twelve month revenue (Yahoo! Finance, 2020).
Discussion of Initial Valuation Accuracy
According to Hitchner (2017), pre-IPO share prices generally hold a significant discount
due to their lack of marketability, which immediately goes away at the time of the IPO. Given
the performance of the stock and the company’s revenue growth, it appears that investors are
valuing the company’s growth prospects at a very large premium as the company is still
unprofitable. The increase in price expectations pre-IPO are most likely attributable to Chewy’s
history of doubling revenue annually and the high recurring-revenue model with approximately
65% of their customers on auto-ship (Chewy Annual Report, 2020). Based on the available data
regarding the stock’s current share price and the company’s growth trajectory, the initial
estimation of value appears to have been inaccurate and overly conservative. Possible reasons
for this inaccurate and low estimate of value could be due to the company’s lack of historical
profitability or to the underwriters’ taking a very conservative valuation approach fearing a
subpar IPO performance as some other unprofitable online retailers have experienced in the
recent past. Chewy’s management decided to fund growth with equity rather than debt, which
aligns with the Bible’s instruction to “Be not one of those who give pledges, who put up security
for debts” (English Standard Version Bible, 2001, Proverbs 22:26).
References
Chewy, Inc. (2020, March 26). Chewy Annual Report.
https://s23.q4cdn.com/610444331/files/doc_financials/2019/ar/NC10011622x1-CHEWY-
INC._10K_2020_V2-Bookproof.pdf
Chewy, Inc. (2020). Chewy Corporate Overview.
https://investor.chewy.com/overview/default.aspx
Chewy, Inc. (2019, April 29). Form S-1.
https://www.sec.gov/Archives/edgar/data/1766502/000119312519170917/d665122ds1a.h
tm#rom665122_7
Chewy, Inc. (2019, June 13). Form S-1MEF.
https://www.sec.gov/Archives/edgar/data/1766502/000119312519172730/d764952ds1me
f.htm
Chewy, Inc. (CHWY) (2020). Profile, business summary. Yahoo! Finance.
https://finance.yahoo.com/quote/CHWY?p=CHWY&.tsrc=fin-srch
Del Rey, J. (2017, April 18). PetSmart is acquiring Chewy.com for $3.35 billion in the largest e-
commerce acquisition ever. Vox. https://www.vox.com/2017/4/18/15339208/petsmart-
chewy-acquisition-price-3-35-billion
English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/
Hitchner, J. (2017). Financial valuation: Applications and models (4th ed.). Hoboken, NJ: Wiley.
ISBN 978-1-119-28660-8
Kilgore, T. (2019, June 14). Chewy ipo: 5 things to know about the ‘pet humanization’ product
seller. MarketWatch. https://www.marketwatch.com/story/chewy-is-going-public-5-
things-to-know-about-the-pet-humanization-products-seller-2019-05-03
Wilhelm, A. & Kunthara, S. (2019, August 22). Here’s who has gone public in 2019 (so far).
Crunchbase News. https://news.crunchbase.com/news/heres-who-has-gone-public-in-
2019-so-far/#Chewy
Response 1:
Thank you for your overview of the Utz Brands, Inc. IPO, Trevor. Utz merged with
Collier Creek Holdings (NYSE: CCH), which is a Special Purpose Acquisition Company (SPAC)
to go public rather than a traditional IPO process (NASDAQ, 2020). Recent times have seen a
strong surge of SPAC IPOs because they expedite the process of taking a company public while
reducing the related costs when compared to filing a registration with the SEC then hiring and
paying an investment bank to underwrite and take the company public in a traditional IPO. Given
the recency of the IPO, there is not significant financial reporting data that has been made
available, which makes for a difficult analysis.
The most recent share price for Utz was at $18.06 and an estimated enterprise value and
market capitalization of $2.16 billion though the listed shares outstanding are 59.37 million at the
listed share price suggests a market capitalization of only $1.072 billion (Yahoo! Finance Utz,
2020). What makes this case very interesting is that the founding family members still retained
90% of their ownership stake, which is still a majority stake at over 50% ownership, which
accounts for the difference in both market capitalization and enterprise value (BusinessWire,
2020). The original post discusses a decision to continue the company’s family roots or shift
directions and go public, but the deal structure suggests that the company is still very much a
family owned and operated business and the combination, while complicating governance and
compliance requirements, was simply a choice to pay off business obligations without selling all
or part of the company to a strategic acquirer or institutional investor (BusinessWire, 2020).
The deal structure and decision to go public also has other potential benefits. For
example, had the family sold part of the company to a private equity group, they would have to
go through the transactional process again at the end of that group’s holding period in order to
provide them a return on the investment while now there is no need for a future transaction
because the company’s stock is liquid. Additionally, going public allows the remaining family
shareholders to realize a liquidity event at any time, almost instantaneously, without the need to
go through the tiresome and intrusive sales process. The decision to go public also provides the
company the ability to capitalize future strategic growth plans via the public market rather than
the world of private corporate finance. The final advantage is that the family retains majority
control of the company, at least for now, rather than losing control to a strategic or institutional
buyer.
Hitchner (2017) suggests that it is common for a pre-IPO discount for lack of liquidity to
occur and that the stock price may quickly rally to a higher amount to reflect the stock’s
immediate liquidity once the IPO occurs. The Utz share price did exceed the IPO offering price,
but it continues to trade close to that range suggesting the range was accurate if slightly low.
Given the structure of the transaction, there is a distinct possibility that the IPO stock price was
intentionally set low in order to benefit the principals in the transaction on future liquidity events
as the company’s solid fundamentals drive the stock price higher. As the Bible teaches, “Every
prudent man acts with knowledge, but a fool flaunts his folly” (English Standard Version Bible,
2001, Proverbs 13:16).
References
BusinessWire. (2020, August 28). Utz quality foods and collier creek holdings complete business
combination to form utz brands, inc.
https://www.businesswire.com/news/home/20200828005352/en/Utz-Quality-Foods-
Collier-Creek-Holdings-Complete
English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/
Hitchner, J. (2017). Financial valuation: Applications and models (4th ed.). Hoboken, NJ: Wiley.
ISBN 978-1-119-28660-8
Utz Brands, Inc. (UTZ) (2020). Profile, business summary. Yahoo! Finance.
https://finance.yahoo.com/quote/UTZ?p=UTZ&.tsrc=fin-srch
Response 2:
Thank you for your overview of the DocuSign IPO, Daniel. The commentary regarding
investor concern over operating losses is very accurate and it is a common theme for technology-
based companies, specifically software-as-a-service (SaaS) companies, as they scale very rapidly
and have an exceptionally high burn rate for working capital. The rapidly scaling revenue is
largely due to long-term contracts that create a high percentage of annual recurring revenue
(ARR), though many that have turned the profitability corner have very high operating profit
margins as well. As most are operated to grow as rapidly as possible, the lingering question about
the company’s ability to turn and sustain a profit will remain a key issue. It is also a critical
reason why many go public after the venture phase because investors in the public market can
and will chase revenue and stock price growth even without profitability, while mature company
institutional investors tend to prefer companies with stable historical profitability.
DocuSign’s IPO was priced at $29.00 per share and opened its first day of trading at
$38.00, which exceeded the expected range and could be attributed to both investor excitement
and the immediate marketability of the stock removing any priced in discounts (Bary, 2018;
Hitchner, 2017). The company’s estimated private market valuation in 2015 was $3 billion and
the IPO offering price represented a valuation of $4.4 billion, suggesting that the IPO was
incorrectly priced low when taken in tandem with the opening trade price (Bary, 2018).
DocuSign’s revenue growth will be exciting to investors, especially in a $25 billion industry, but
the consistent operating losses mean that price appreciation is the only realistic play for investors
as there are no earnings to distribute as dividends and it is unlikely that will occur in the near
future (Bary, 2018). The big concern for DocuSign and other SaaS companies with a similar
profile of high revenue growth and large operating losses is whether revenue growth and the
corresponding share price appreciation is sustainable.
DocuSign’s most recent share price was $194.86, which represents an exceptional return
of 513% to the opening $38.00 per share in just under 2.5 years for investors who have held onto
their stock (Yahoo! Finance, 2020). DocuSign’s revenue has also nearly doubled in that time
with fiscal year 2019 revenue of $974 million, though trailing twelve-month revenue appears to
have contracted a bit to just $828 million, but the company has yet to post an operating profit
(Yahoo! Finance, 2020). The lack of profitability does not appear to have discouraged investors
given the stock price appreciation, but after consistently trading in the $40.00 to $60.00 range for
the first year of trading the stock slowly began appreciating in September of 2019 and then
pitched up dramatically in March of 2020 to the current price suggesting a strong correlation to
COVID-19 and the resulting remote-work environment. Given the lack of profitability and the
correlation to COVID-19, investors would be wise to heed the Bible’s instruction that “The plans
of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty”
(English Standard Version Bible, 2001, Proverbs 21:5).
References
Bary, E. (2018, April 29). DocuSign ipo: 5 things to know about the e-signature company.
MarketWatch. https://www.marketwatch.com/story/docusign-ipo-five-things-to-know-
about-the-e-signature-company-2018-04-06
DocuSign, Inc. (DOCU) (2020). Profile, business summary. Yahoo! Finance.
https://finance.yahoo.com/quote/DOCU/
English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/
Hitchner, J. (2017). Financial valuation: Applications and models (4th ed.). Hoboken, NJ: Wiley.
ISBN 978-1-119-28660-8
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