2021 was a record year for initial public offerings (IPOs), with roughly 1,080 companies going public. Despite all of these companies choosing to go public in such a short space of time, not all of them were entirely successful.
The Renaissance IPO Index, which tracks newly listed U.S. companies and their performance, finished down approximately 8% for the year. Comparatively, the S&P 500 index rose by 25% for the year.
Justworks, a cloud-based human resources (HR) software platform, will be hoping to buck that trend as it looks to go public imminently.
Justworks offers a suite of software capabilities for small businesses that encompasses payroll, tax filings, onboarding, time management, and much more. Its mission is "to help entrepreneurs and businesses grow with confidence." It offers a simple and intuitive platform that allows smaller businesses to focus on the things that matter while leaving some of the more "nitty-gritty" tasks to Justworks.
The company's core business line is its cloud software subscription service. This accounted for $87.4 million in revenue from June 2020 to June 2021. The firm also collects what it terms as "benefits and insurance-related revenue." This involves collecting revenue related to administrative fees from its customers for various insurance plans such as medical or dental. It accounted for $895.3 million in the same year period but cost Justworks $842.9 million in fees, indicating that it's a low-margin form of revenue.
No specific date has been given by the company for its impending IPO just yet, but S-1 filings went through last week in a move that signals an impending offering. The firm will offer 7 million shares priced between $28 and $32 per share. Justworks will be listed on the NASDAQ exchange under the ticker symbol "JW."
For the fiscal year ending May 31st, 2021 Justworks reported total revenue of $982.7 million. This represents a growth of 32.4% year-over-year (YoY). This also represents the first year the company did not report an operating loss since its inception in 2012. With the firm looking to continue to expand its customer base as it goes public, it's very likely that it could post further losses. In fact, for the three months ending on August 31st, 2021 the company reported a net loss of $5.1 million.
Justworks offers an interesting value proposition to investors. Its target market is U.S.-based small businesses with less than 100 employees. According to its S1 filing, this accounts for approximately 40 million employees across the nation. This market is typically underserved as smaller companies often have complex needs and simply aren't as lucrative as larger multinationals.
By targeting this niche, Justworks has fantastic potential to carve out a formidable market share. The company estimates that its current addressable market size is $40 billion. If the firm can further penetrate this market and continue to offer an expansive suite of core capabilities, it could see remarkable growth.
However, the company also faces a number of notable risks. Competition from larger companies could hamper Justworks' growth. The firm also needs to address its history of operating losses. Despite subscription revenue increasing consistently since 2019, the cost of revenue is also continuing to rise. Potential investors will be eager to see a clear path towards profitability for the company before parting with their money.
As one of the first major IPOs of the year, it's very possible that Justworks benefits from the hype surrounding many public debuts over the last number of years. Investors would be wise not to get caught up in this, and to remember the underlying financials of the company. Waiting to see a couple of quarterly earnings reports before investing is never a bad choice, and could be of particular benefit here as Justworks seems to be right on the cusp of becoming profitable.
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