Market loses taste for Lemonade

Lemonade IPO  credit: Company Facebook page
Lemonade IPO credit: Company Facebook page

Stocks like Lemonade, Fiverr and Wix have fallen because of fashion, not the business, Oppenheimer's Avivit Mannet-Kalil tells "Globes".

Israel's technology stars of 2020 on Wall Street are losing altitude. In the past few months, investor taste in the US has changed, and with it the positive momentum that some of the companies were befitting from.

First and foremost, this applies to Internet companies. The hype surrounding them following the outbreak of the coronavirus pandemic led their share prices to shoot up in the past year. To them can be added several star stocks from other technological fields in which there has been a heavy sell-off after the sharp rises.

Take Internet stock Fiverr (NYSE: FVRR), for example, which was floated in June 2019 at $21, and which added 90% to its value on its first day of trading. By February 2021, the stock had risen 1,500% altogether, to a peak of $336.

Since then, however, Fiverr's share price has dived 50% to $166, a price that still values the company at $6.1 billion, giving a multiple of 27 on sales.

Another Internet company, Wix (Nasadq: WIX), which provides tools for building and managing Internet sites, is down 38% from the peak it reached last February, and it is now traded at $225, an eleven-month low. Wix's market cap is now $12.7 billion, giving a sales multiple of 12.

Another two Israeli companies floated last year are insurance via Internet company Lemonade (NYSE: LMND), and software updating company JFrog (Nasdaq: FROG) . Lemonade, which made its IPO in July 2020 at $29 per share, was up 550% by January 2021 at a peak of $188.

Since then, however, the stock has lost 60% of its value, falling to $73, giving a market cap of $4.5 billion and a sales multiple of 49.

JFrog was floated last September at $44 per share, and the share price shot up by more than 100% within two weeks to a peak of $90, since when it has fallen to back 60% to below the IPO price, at $36, giving a market cap of $3.4 billion. Solar energy technology company SolarEdge Technologies (Nasdaq: SEDG) has also fallen hard in the past few months, and its share price is down 42% from its peak.

"A general sell-off of growth company stocks"

Avivit Mannet-Kalil, co-CEO of Oppenheimer Israel, says that nothing has changed in the business performance of the companies themselves. What has changed, she says, is investor taste. Investors have decided to abandon growth companies in favor of more solid companies that were hit hard by the pandemic.

"There has been a general sell-off of growth company stocks that were very generously priced during the coronavirus year," Mannet-Kalil says, "some for good reason and some because of the trend story. That drove the entire growth sector, but particularly breakthrough companies and those revolutionizing consumer use.

"2020 accelerated all the processes of change in the world, and so we also saw very generous multiples on the stock market, dream multiples, and we recall from the past that the US capital market knows how to reward growth and dreams.

"This is what drove the market last year, and alongside the coronavirus trauma it served as a 'particle accelerator' for disruptive technology companies that managed to make an impression. Things that it was thought would take five years suddenly happened in a year," she says.

"What happened in 2020 was a real revolution"

The trends that Mannet-Kalil describes had a positive effect on Israeli companies in online fields: Wix, for example, which enabled businesses to venture away from the physical world and within a short time become entities in the virtual world, and to survive by serving customers online.

It was a similar story with Fiverr, which enabled many small businesses to become accessible to customers around the world, and thereby generate more growth and profit. "What happened in 2020 was a real revolution," says Mannet-Kalil.

She also mentions Lemonade. "Its advent is a crazy disruption to the world, using artificial intelligence in the insurance industry. In Israel and globally, online insurance companies are taking bites out of the market share of the established companies, and the latter are even investing in the online companies, because they realize that they have to get into this business."

All the same, she says, revolutions die down, and so it was in 2021 as coronavirus vaccination programs took hold around the world, which has helped the real-world economy make a comeback this year.

"We have seen a switch by investors from the virtual world - which grew fast and which is liable to grow a little less fast even though business is excellent - back to the real world, because if the economy grows again, and people go back to flying and go to restaurants again and energy prices rise again and the banks present growth in their businesses alongside the real growth, then there's another alternative for a return, perhaps more comprehensible and more concrete for the investment world.

"Since the beginning of the year, and even from October 2020, we have seen a switch of investment from the virtual-Internet world to the concrete-real world. And it’s a question of a change in fashion as well, because I see no problem in the companies' business performance. They continue to grow, and business is good, but there are fashions and there are cycles.

"The flow of money has changed. Tastes have changed, but that doesn’t mean that the real business of these companies has changed. They've continued growing. But if we look at a company like Wix or Fiverr in another five years, they will be even bigger, and I think that they are moving in an excellent direction."

So in effect the market got ahead of itself and priced these companies too generously, and now they're falling back a little.

"Exactly. The prices were crazy, and Fiverr, for example, was traded at a sales multiple of 30. So you can understand why a stock is expensive. Investors are momentum-oriented and fashion-oriented, and as soon as growth returns and bond yields rise, there's a comeback for the more basic, tangible world.

"So what happened is that the fashion changed and the pricing level declined, and because of that there are analysts who are cutting their price targets for these stocks by 20% to 30%, because of the decline in multiples on the market. All that is despite the fact that the businesses remain strong and the recommendation for these stocks remains 'strong buy.'

"One pricing method is to look at how the environment is priced, and according to that to examine the particular company and determine whether it merits a higher than average multiple, or lower than average. So one of the methods on Wall Street is this us of the relative multiple, but if all the stocks in the sector fall, the analysts are obliged to cut the price targets for the stocks they analyze. So most of the price target cuts are currently because of a decline in multiples in the sector, and not because there is something wrong with the financial performance of the companies."

Wall Street giveth, and Wall Street taketh away…

"Just so. Sometimes it's bad, but it's also sometimes good, because that way new entry opportunities are created in the market at more sensible prices."

Published by Globes, Israel business news - en.globes.co.il - on May 19, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Lemonade IPO  credit: Company Facebook page
Lemonade IPO credit: Company Facebook page
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