A Week After Its IPO, I’m Looking to Short FIGS

Shah Gilani|June 3, 2021

Initial public offerings (IPOs) are always one of the hottest areas of the stock market – and attract the ardor of investors and traders, alike.

One brand-new IPO received an even-greater-than-usual amount of attention – because it was the first to debut on the Robinhood trading platform.

Total Wealth’s Shah Gilani has been watching the company – and the deal – and gave us a great analysis ahead of its debut last week.

Today, on the one-week anniversary of the stock’s debut on the Big Board, Shah looks at the deal again, tells us what comes next – and tells you how to trade it.

Here’s an edited transcript of Shah’s talk with Total Wealth…

TW (Q): Okay, Shah, let’s talk Figs Inc. (NYSE:FIGS) – which received a strong reception thanks to its IPO a week ago today (Thursday).

You put the stock on your “Watchlist” … which came out over the long weekend.

The stock’s been trading for a few days now. So let’s drill down and see what’s next.

SG (A): Sounds good … fire away.

TW (Q): Fig’s definitely an interesting company – because of the market it’s targeting and the business model it’s chosen – which we’ll get to in a minute. But there’s another unique storyline here, isn’t there? And it’s a storyline that ties into something you’ve been talking about for a long, long time – the empowerment of investors through the access to fractional shares thanks to innovative new platforms, like Robinhood.

SG (A): That’s right, it’s absolutely right. FIGS is the first stock that Robinhood investors can get into pre-IPO, meaning Robinhood’s made it possible for everyday investors, not connected insiders and favored institutional clients, to buy shares at the price set for the stock the evening before it debuts on its exchange and everyone else can buy it. That’s a game-changer for retail investors and hats off to Robinhood for pulling that off, which let me add, was no easy feat.

As you all know, I’ve been doing this for a very long time. And I’ve watched the shifting tides of the IPO market … which has always been the sole bailiwick of high-net-worth investors, big institutional clients, and let’s call them “friends and family.”

TW (Q): By that you mean the underwriters reserved the really good IPO deals for their very best (i.e. richest) clients.

SG (A): That’s right … wealthy clients, clients that generate a lot of trading or banking revenue for the brokerages that get IPO allotments, but that’s changed. And as the first IPO available on the egalitarian Robinhood platform, the FIGS deal is really worth a good look.

What Robinhood did is to roll out its new IPO Access feature, a tool that lets its users attempt to buy shares of IPOs, at their initial price, before they start trading in public, that would otherwise be impossible for them to access.

Robinhood was granted a limited number of FIGS shares. But the company assured investors that everyone who applied for shares would get an equal chance at getting shares regardless of how big their account is at the firm.

TW (Q): Kind of a lottery?

SG (A): [Nodding] Pretty much …

TW (Q): So how did it work after that?

SG (A): The deal was priced at $22 a share. Robinhood investors who were allocated shares of FIGS were in the trade at that $22 price. That’s the watershed event, that Robinhood peeps got in on the ground floor, absolutely fabulous.

Once the stock began trading, investors who wanted FIGS shares were buying in what’s known as the “secondary” market.

On their trading debut Thursday, the stock opened at $28.30, up 28% from its $22 IPO price. It ended that first day of trading at $32.11 (check your #, I see it ending at $30.02) – meaning it jumped 46% (36.5%) in its debut as a public company.

TW (Q): A very strong debut …

SG (A): Yes it was…

You see, the original plan was for the company to issue 22.5 million shares – at a price between $16 and $19 a share.

But demand was so strong, the offering was bumped up to 26.4 million shares – at a price of $22. So it was all well above the expected range.

TW (Q): So, Shah, when you look at an IPO … you know, when you “evaluate” a deal like this … what do you consider?

SG (A): Obviously, when it comes to the IPO and the stock debut I look at demand … which we just talked about.

And I look at the company itself – the market its serving, its competition, its business model, capital structure, and its management team.

I obviously look at financials – its most-recent sales and earnings … and what the top and bottom lines, are projections going forward, a lot of metrics.

And, Once the deal debuts, you have to consider how it’s trading in the secondary market.

TW (Q): And by that you mean …

SG (A): Here I’m talking about how aggressively the crowd trades the stock in the secondary market. For FIGS, that’s the 46% (36.5%) gain the stock logged after its IPO debut. What happened the next day, when the stock closed at $34.15 for a 55% gain from its IPO. And then, after the long Memorial Day weekend.

That was a true windfall for investors granted the shares at the offering price of $22. But what we’re talking about now is: Is the stock a good deal now?

The question you have to ask is: If I buy, will I end up “holding the bag” – like we saw with retail investors who grabbed Coinbase Global Inc. (NASDAQ:COIN) in the secondary market after its April 14 debut.

TW (Q): I remember that … it was pretty frenetic.

SG (A): It certainly was. And all the pre-IPO hype fed into that. COIN had a “reference price” of $250 a share, but when the stock shot out of the gate at about $381. It briefly traded above $429 – giving it a market value in excess of $100 billion – and finally ended that energetic first day at $328.28.

Because this was so long-awaited … and the interest was huge – almost 17 million shares changed hands in the first 10 minutes alone …

TW (Q): But it’s what we’ve seen since that has you holding this up as a kind of “case study” for FIGs …

SG (A): That’s right. Six weeks after the Coinbase deal, the stock is at $240 … below its offer price and about half its peak.

The FIGS IPO looked good because the company looked good. It came to market with a great story. Sales are increasing, and it was the beneficiary of a lot of positive press, including the very important Robinhood pre-IPO story.

What was also important was how the stock traded after the long Memorial Day weekend. With the hype wrung out on Tuesday the stock tried to go higher, it was pushed higher, but there wasn’t the kind of demand it had on and right after its IPO, and it ended the day down 7%, closing near its lows of the day.

It’s down another 2.5% as we’re talking here now (Wednesday).

At the end of the day, it’s just a clothing company, with a limited customer base in my opinion. It’s not a social-media company that can scale up to meet demand of a nearly unlimited customer base. It’s not a company riding a powerful trend – unless we’re talking healthcare workers’ attire trends. It’s not a company with an innovative, “enabling” technology.

And what’s really a red flag for me, the company’s largest shareholder, a huge backer of FIGS sold 21.75 million shares in the IPO, they upped the amount of shares they were selling from 16.63 million to 21.75 million. I get they wanted some gravy, but if you’re a major shareholder and you think the stock price can keep going up, why would you sell so much at $22?

By the way, another 4.64 million shares were sold by the company itself in the IPO, that’s not the kind of stakeholder confidence that I want to see.

As I told my Total Wealth “Watchlist” followers, I would wait to see how the stock traded “after the IPO” – in the secondary market. And also wanted to watch to see what the Reddit “narrative” would look like … since that’s becoming an influencer on “in-the-headline” stocks.

As I said before the IPO, when stocks like this one pull back after the first week of trading, especially if they pop and look like they could come back down to their IPO price, I look to sell the shares short, dump them outright if I owned some, or perhaps pick up some “puts” – once there’s an established options market for the stock.

On the other hand, if shares continue their surge, I’ll sit the dance out on the sidelines. There’s not enough meat on the bone here, to justify chasing this stock back up to its glory days of last week

TW (Q): Okay, we’re a week into “life with FIGS as a public company.” The stock is trading at $31.81 – which is a 44% change from its offering price.

So how do you play the stock here?

SG (A): Given how FIGS has traded, hyped higher only to falter, I’d brave the bulls and short it. If it falls back to its IPO price of $22, I think there’ll be even more selling. Depending on what the stock does if it falls through its IPO price, I might look to buy it there for a bounce.

TW (Q): Thanks, Shah.