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IPO Warriors IPO Preview for January 24 – January 28, 2022

January 24th, 2022

Last week’s IPO slate gave us a full-spectrum of low-float IPOs ranging from sketchy Stealth IPOs, to boring bancorps, to biotech busts, and a warrant offering… but no mainstream debuts. This week gives us at least one brave company willing to test the IPO conditions, and not much else.

It’s still early in the year, and market conditions have been poignantly adverse to growth stocks: and given that IPOs pretty much designed to raise capital for companies to help fund growth and expansion, we’ shouldn’t be too surprised to see a thin IPO calendar in this climate. But there are still plenty of profit taking opportunities amongst the low-float, second (and third) tier underwritten offerings: which in many ways, provide more volatility and win potential than their mainstream counterparts. With this in mind, we venture forward.

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Note: You’ll notice that I’ve updated the format of the IPO listings in this newsletter to include richer statistics and deeper analysis, I’ve also added the upcoming Quiet Period Expiration (QPX) and Lockup Period Expiration (LPX) list at the bottom of the newsletter with breakdowns on what opportunities I’m looking for there.

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Ok, Let’s jump in:

FGI Industries (FGI) – January 25, 2022
Price Range:
$6.00 – $8.00
Offering Size: $23M + $17M in underlying warrant included in the Units
Float: 2.5M Units (shares + warrants)
Total Shares Outstanding: 9.5M Shares

Industry: Home Improvement Products

Overview:
This company sources kitchen and bath products from China and distributes them through a global network of suppliers. They have distribution arrangements with The Home Depot, Lowe’s, and Furguson, and sells private label products for Home Depot and Furguson. Their products target the middle and upper end of the retail price points. They are focusing on increasing profit margins developing new sales channels and increasing their share of branded products.

Considerations: Sure, people have been renovating their homes like crazy, so I guess this is a good industry to be in. But they are profitable and generating growth, with distribution partners including The Home Depot and
On the surface, this one looks a bit like a potential Stealth IPO setup, with a clear Chinese connection and ultra low float. But while we have seen a couple of recent IPOs underwritten by The Benchmark Company that have made explosive runs directly off their IPO or shortly thereafter (BFRI and AERC), we don’t have any pattern history of the kind of dubious setup like we’ve seen consistently demonstrated by certain other underwriters (like what we saw with TKLF last week: a Univest offering.
This one has already been rescheduled twice, and had warrants added, so it doesn’t really feel like a Stealth IPO setup to me, in which case, the need to add warrants makes me think there’s not a ton of demand, but already it’s gotten the attention of low-float/day-traders so I definitely see potential..

NOTE: I have put in for a tiny allocation request on WeBull and will report my fill on Tuesday morning to measure allocation size.

Growth Numbers:
– Revenue Growth:
+31% for 9 months ending September 30, 2021
– Gross Profits:
+15.6% for 9 months ending September 30, 2021
– Gross Margin:
20% for 9 months ending September 30, 2021

Baseline Financials:
– Cash Flow:
positive – declining (positive for past three years)
– Net Income:
positive – improving (positive for past three years)
– Operating Profit:
positive – improving (positive for past three years)

Notes from the S-1:
– Incorporated in the Cayman Islands
– Heavy short term debt: $13M in short-term loans
– Immediately after the offering, 9,500,000 ordinary shares will be issued and outstanding, of which 74% will be held by insiders and affiliates of FGI and 26% will be held by public investors (2,875,000 ordinary shares will be issued and outstanding if the underwriters exercise in full their option to purchase additional ordinary shares and/or warrants, of which 71% will be held by insiders and affiliates of FGI and 29% will be held by public investors).
– Risks: supply chain and materials exposure
– Risks: dependence on China as primary source of products
– Risks: top ten customers contribute majority of sales
– Risks: current legal proceedings to preserve exclusive distribution rights with Huida (ongoing for 10 years).

Underwriter:
The Benchmark Company, Northland Capital Markets

IPO Classification:
Ultra Low Float | Potential Stealth IPO

Recent Similar IPOs: HOUR, TLKF (?)

Trading Strategy:
The setup on this one is not to be played based on fundamentals, which are actually not bad to begin with, but in my opinion it is simply a low-float debut that may get pumped by insiders, or may just get pumped by day traders looking for a low-float target to trade: HOUR ran on pure trading momentum: 50M shares traded on its debut with a 1.5M share float. Compare that to about 3M shares traded on day one for TKLF with a 6M share float and you can see these are in fact quite different animals.

If this starts trading with any kind of hefty debut premium, it’s likely a Stealth IPO, and could go ballistic if the price isn’t blown up to a ridiculous level. A reasonable Stealth IPO debut price is in the $14-18 range, and would indicate multiple halts upward (it could also crash out, so keep a close watch on the buy-side/sell-side imbalance). If the debut is at or below the IPO price, which is likely due to the price of warrants being factored in, then it’s almost certainly not a Stealth IPO setup.

The play at that point is to gauge whether the low-float will be seized upon by day traders on Day 1, or whether this dies off before trading groups and algos boost it for what I would then expect to be a short lived pop. If the market doesn’t offer any other day trades on Tuesday, and this one does proceed with its debut, it could be an attractive day trade so long as it doesn’t get pumped to a ridiculous price on the debut. I don’t really love the potential $8 IPO price though: feels much safer when these are offered in the $4-5 range.

Watch for a buy-side vs sell-side imbalance in the pre-debut crossing, and gauge retail allocation sizes to determine whether we should expect an opening dump or run on the debut. A ladder-trade or ‘wait-and-see’ entry might make more sense, given how warrants often cause some pricing confusion in these setups.


Brand Name Recognition:
Basically none.

Debut Trade Conviction Level:
High. I like that it could be a Stealth IPO, but I sort of doubt it, I actually like it more as a pure low-float debut that could debut at a level that leaves room for day traders to pump it on Day 1.

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Credo Technology Group (CRDO) – January 27, 2022 | 25M Shares
Price Range:
$10.00 – $12.00
Offering Size:
$345M (the company is raising $275M with insiders selling additional shares)
Shares Outstanding:
148.7M

Industry: Semiconductors

Overview:
This semiconductor manufacturer produces components designed to optimize high-speed data transfer solutions in wired data communications applications. Basically, microchips that speed up data transfer, improve power and cost efficiencies, and optimize bandwidth in the data infrastructure market.

Considerations: Given the global shortage in semiconductors and exponentially growing amount of data being generated by every facet of business, this company is perfectly situated for high product demand and growth.

Growth Numbers:
– Revenue Growth:
+45.8% for 6 months ending October 31, 2021
– Gross Profits:
+25.5% for 6 months ending October 31, 2021
– Gross Margin:
56.89% for 6 months ending October 31, 2021

Baseline Financials:
– Cash Flow:
negative – improving (positive fye 2020)
– Net Income:
negative – improving (positive fye 2020)
– Operating Profit:
negative – appears stable

Notes from the S-1:
– Incorporated in the Cayman Islands
– Blackrock and associated funds have indicated an interest in purchasing
$120M in shares from this offering.
– Generated positive net income of $1.3M for fiscal 2020
– Risks: expected cost increases to fund R&D
– Risks: fluctuating revenue and operating costs
– Risks: limited customer base – 3 customers accounted for 54% of revenue in fiscal 2021. 4 customers accounted for 73% of revenue in 6 months ending 10/31/2021

Underwriters:
Goldman Sachs, BofA, Cowen, Mizuho, Needham, Stifel

IPO Classification:
Mainstream IPO

Recent Similar IPOs: GFS, SKYT

Trading Strategy:
It’s highly conceivable that this IPO gets pulled altogether: the market has been on a severe downtrend and we’ve really only seen one mainstream IPO go live so far, with TPG Group opting for a relatively conservative debut that ensured that IPO buyers and retail traders were given access at prices that provided enough breathing room to offer modest immediate gains.
If they do proceed with their IPO this week, that’s certainly a sign of strength given the participation of Blackrock and other institutional backers. I would not expect this to price above range, but if we see a premium in the debut price above about 20% I would be pretty cautious. While JP Morgan debuted TPG at a price that ensured it wasn’t immediately sold off, we did see a heavy buy-side imbalance at $33.00 in the pre-debut balancing and they held that as the debut price until a sufficient number of sellers decided to pair demand. Goldman, on the otherhand, tends to milk every incremental buy-side offer for a maximum debut price, and in a weak market, that may not leave much room for upside movement once the shares start trading. This isn’t really a household brand name, but like SKYT and GFS – two semiconductor manufacturers that IPOd last year on opposite spectrums of size and scale, we could see run in the days following the IPO if we see debut pricing inline with or just slightly above the IPO price.
To summarize, I’d like to see this one priced at $11-12, and debut between $13-16. Even with strong demand, I would expect some opportunity to catch a dip off the debut before a possible upside move, so a ladder-entry (setting incremental limit orders at and below the indication price), is probably a solid move for a starter position, with some ammo held in reserve to average down on a dip. If the market continues to crash throughout the week, this one will probably get pulled anyway. If we’re starting to see some recovery, this could be an ideal time to enter for a longer swing trade.

Brand Name Recognition:
Low.

Debut Trade Conviction Level:
Moderate. In a strong market, perhaps this does well, so if the market is on the cusp of turning around, it could be a very fair price at the debut. Unless Goldman pumps it into the debut, I expect limited downside with moderate upside potential.

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Direct Digital (DRCT) – Date TBD | 4M Shares
Price Range:
$7.00 – $9.00
Offering Size:
$36M
Shares Outstanding:
15.38M

Industry: Programmatic Ad Buying/Selling

Overview:
This holding company operates three platforms that provide services in the digital ad management space:

Colossus SSP: is a supply side platform that sells ads for their media customers.

Huddled Masses: creates digital marketing campaigns for clients. Kind of seems like a well-established digital marketing agency.

Orange142: this is the demand side platform that handles data management, audience targeting, content marketing, and analytics for their clients.

They claim 56k sell-side clients (clients selling advertising), and just 158 buy-side clients. So it seems like their primary business is selling ads for their clients, and Colossus SSP appears to be their primary revenue driver.


Considerations: This all feels like a digital marketing company that has built up scalable services platforms to offer services to mid-sized businesses that want to optimize their digital marketing budgets. With very strong growth metrics and positive baseline financials, coupled with a low float, this one could be interesting. The IPO date hasn’t been set yet, which makes me wonder if they will actually debut this week, but one to put on our radar.
Don’t particularly like that Roth Capital is an attached underwriter, as the market has repeatedly shunned their offerings, seemingly out of spite. So that makes me a bit cautious in taking any risks on this debut.

Growth Numbers:
– Revenue Growth:
+330% for 9 months ending September 30, 2021
– Gross Profits:
+693% for 9 months ending September 30, 2021
– Gross Margin:
53% for 9 months ending September 30, 2021

Baseline Financials:
– Cash Flow:
positive – improving (negative in 2020 and positive in 2019)
– Net Income:
positive – improving (negative in 2020 and 2019)
– Operating Profit:
positive – improving (negative in 2020 and 2019)

Notes from the S-1:
– Risks: restricted use of 3rd-party cookies (specifically by Google), would affect the effectiveness of their platform. While they believe they can adapt and develop alternatives, without specific clarification on how they will do this, I am a little concerned about the long term performance of this company.

Underwriters:
The Benchmark Company (yes, same as FGI above), Roth Capital

IPO Classification:
Low Float

Recent Similar IPOs: HOUR PIK STRN
Potential Comps: TTD… sort of a stretch given that TTD is much larger, but they both operate in the same general market, so comps are not unreasonable. DRCT is seeking a far smaller valuation.

Trading Strategy:
This IPO does not have anything that indicates a Stealth IPO setup, and I’m not sure how sexy this will appear to day traders beyond the low, but not ultra-low, float, so I will be monitoring social media chatter to see if there appears to be much interest in this ticker leading up to the IPO. The $8 debut price leaves plenty of room to fall off the open (like VINE did), so again, we need to be watching the sell-side imbalance on the debut. If we see a heavy buy-side and only a slight increase in the debut indication price, then we may have a strong candidate for a debut run, but anythinog else would indicate a more conservative strategy. This one kind of feels like it could behave like STRN, which had a strong debut run for several days after the IPO, followed by a hard pull back, and then pumped even higher. The potential for a post-dip recovery run is pretty strong if this one doesn’t perform well out of the gate, so averaging down and holding for an eventual algo or trading group pump could be a prudent move if this slips on the debut.

Brand Name Recognition:
Low.

Debut Trade Conviction Level:
Moderate/High. Play the debut conservatively, and be prepared to average down if it drops. The float isn’t ultra-low, but small enough to run at some point, and the company appears to be solid across growth and financials.

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Samsara Vision (SMSA) – Date January 28, 2022 | 4.16M Shares
Price Range:
$5.00 – $7.00
Offering Size:
$29M
Shares Outstanding:
15.38M

Industry: Medical Devices

Overview:
A medical device company developing a second generation version of their implantable microsope device that is inserted into the patient’s eye to help correct age-related vision problems (macular degeneration – AMD). They have 14 US patents and 97 total active patents, some of which are set to expire as early as 2023, with the most broad patent slated to expire in 2038.


Considerations: Still in early commercial testing in Europe, and hasn’t started the FDA process. Not an IPO debut I’m interested in playing, but one to keep an eye on if it drops for a potential QPX play.

Growth Numbers:
– Revenue Growth:
N/A ($31,000 revenue in 2021 vs $0 in prior year)
– Gross Profits:
N/A ($26,000 GP in 2021 vs $0 in prior year)
– Gross Margin:
Estimated at 85-90% for their primary device

Baseline Financials:
– Cash Flow:
negative
– Net Income:
negative
– Operating Profit:
negative

Notes from the S-1:
– Risks: Failure to get FDA approval would make it impossible to capitalize on US Market.

Underwriters:
ThinkEquity

IPO Classification:
Low Float Biotech (aka Biotech Bust)

Recent Similar IPOs: IINN BEAT
Potential Comps:

Trading Strategy:
Just another low-float IPO that has been rescheduled a few times and offered on WeBull for allocation request for a while. Likely to sell off initially, and probably not worth trying to scalp a pop on Day 1, though I would expect trading

Brand Name Recognition:
None.

Debut Trade Conviction Level:
Low. I don’t recommend buying the debut on anything biotech, but at least it’s not a pharmaceutical. Could get pumped later in the day or on Day 2 if trading groups gobble it up and pump it, but a more likely play would be to wait for it to dip below $3 over the next couple weeks and then hope for PR after QPX.

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