After gaining as much as 9% during its debut last Thursday, shares have been in free-fall since and are currently trading 5% below the stock's $38.50 opening price.
The more hype there is for an IPO, the more likely it is to attract short-term momentum traders who are looking to ditch the stock after an initial pop. Once it becomes clear that the tide has turned, a cascade of selling sends shares careening lower as traders lock in profits.
As the downturn escalates, short sellers then pile on to amplify the move. If the IPO also happens to have an ultra-rich valuation (like WORK), it becomes an even more compelling target for short sellers.
Some highly touted IPOs can rebound, while some languish below their IPO price for a long time. For instance, UBER has made a solid recovery while LYFT has struggled to sustain upward momentum.
This is when fundamentals come into play.
Due to its dominant market position, its improving take-rate in ride sharing, and its growth potential in other areas such as food delivery, investors took advantage of the disappointing start in UBER and have built up positions.
This gives us confidence that WORK will enjoy a similar comeback. Now that the dust is settling and the initial momentum-based move is playing out, its strong fundamentals should also become the focal point.
Key Takeaway: In our opinion, it is very difficult to ignore WORK’s high-double digit revenue growth, especially for a business tracking towards $500 mln in revenue.
Furthermore, as a leader in the workplace collaboration software industry that has barely scratched the surface of its $28 bln total addressable market, its rich valuation (estimated forward P/S of ~20x) shouldn't be much of an impediment for the stock.