Technology investors have made big gains in the past year, but some are starting to get anxious. The concern that rising bond yields and more government stimulus could eventually lead to inflation has scared some investors who have been putting their money into high-tech stocks during the pandemic.
But the recent liquidation of technology should not worry long-term investors. The drop represents a great buying opportunity if you know where to look. We asked some Motley Fool employees for some good tech stocks to buy now, and Shopify (NYSE: SHOP), Lemonade (NYSE: LMND), and Okta (NASDAQ: OKTA) topped his list. Here’s why.
Image source: Getty Images.
Throwing the baby out with the bath water
Danny Vena (Shopify): With all the market madness we’ve seen in the past few weeks, it’s hard to know whether this is merely a rotation of the technology stock sector for pandemic reopening games, or whether we are on the verge of a complete market crash. “A rose with any other name would have the same sweet smell,” or so the saying goes.
Investors are selling good and bad companies, or throwing the baby out with the bathwater. This is creating some attractive business for technology companies. One stock that investors should buy now is Shopify.
When the e-commerce company announced its fourth quarter results in mid-February, the numbers that characterized much of last year showed no signs of slowing down. The $ 978 million revenue grew 94% year on year, while the gross volume of goods (GMV) – or the value of products sold on its platform – soared 99%, to more than $ 41 billion.
These numbers were driven by subscription revenue, which rose 53% and merchandise solutions, which rose 117%. At the same time, monthly recurring revenue grew 53% to $ 83 million, driven by the high number of merchants who continued to join the Shopify platform, even after a record influx in the third quarter.
The company’s growing leverage came into play, as net income for the quarter grew to $ 124 million, from $ 0.8 million in the same quarter a year ago. This resulted in earnings per share of $ 0.99, up from $ 0.01. This illustrates that as Shopify continues to add more merchants and the value of those sales increases, an increasing amount of profits will fall to financial results.
It is important to note that while the adoption of e-commerce that accompanied the pandemic may decline, it is not going away. The United States Department of Commerce reported that in the fourth quarter of 2020, online sales grew 32% year-over-year and accounted for almost 16% of total retail sales. Now that consumers have become accustomed to the ease and convenience of online shopping, there is simply no turning back.
With Shopify dropping more than 23% from recent highs, the stock looks downright cheap in comparison, giving investors the opportunity to get a top-tier company at a rare discount.
Image source: Getty Images.
Is the market going sour with this sweet disruptor?
Brian Withers (lemonade): Lemonade is facing the established insurance industry with its innovative customer service model, powered by artificial intelligence and chatbots. Customers love being able to get quotes for insurance products (pets, renters and owners) in less than two minutes and one third of all claims are paid instantly. But it goes even further, allowing its members to choose a charity to benefit from unused unpaid premiums for claims at the end of the year.
This innovative model that puts the customer first is gaining market share. Its “current awards”, or the sum of all annual awards in effect at the end of the period, grew 87% year on year. Customers grew 56% in the same period, while premiums paid annually per customer increased 87% and their gross loss rate is improving. Even their quarter-to-quarter comparisons are strong amid the ongoing pandemic.
|
Metric |
Fourth quarter of 2019 |
3rd quarter of 2020 |
Fourth quarter of 2020 |
Change (QOQ) |
Change (YOY) |
|---|---|---|---|---|---|
|
Award in force |
$ 114 million |
$ 189 million |
$ 213 million |
13% |
87% |
|
Customers |
643,000 |
941,000 |
1 million |
6% |
56% |
|
Premium per customer |
$ 114 |
$ 201 |
$ 213 |
6% |
87% |
|
Gross loss rate |
79% |
72% |
71% |
(1%) |
(8%) |
Data source: Lemonade. QOQ = quarter after quarter. YOY = year after year.
It looks like the company is firing on all cylinders. So why is the stock 50% below its biggest rise since the beginning of the year? There are a few reasons. First, the technology stocks have been on sale for the past few weeks, returning some of the incredible gains from the past 12 months. Second, reported revenue actually decreased 13% year on year, to $ 20.5 million. This can be confusing for investors, but management explained that, due to the change in the business model on July 1, 2020, to use proportional reinsurance, this year-over-year revenue comparison “is not directly comparable.” Finally, the market may also have been disappointed with the company’s prospects, which were slightly below analysts’ expectations. Add it all up and more experienced investors will see a stock that is for sale today.
In all, the company is executing its strategy well, winning customers, increasing its offers and gaining market share. Investors would do well to take advantage of the stock’s discounted price today, with the mindset to keep it for the next three to five years (or more). You will be happy to have done this.
Image source: Getty Images.
Ignore the noise, this stock of technology is still growing rapidly
Chris Neiger (Okta): Okta, the identity and access management (IAM) company, experienced exceptional growth in 2020, and investors responded by raising the company’s share price by 120% last year. But the company’s stock price has recently dropped after Okta released its fourth-quarter 2021 results.
Investors pushed shares down about 10% earlier this week, but the liquidation was a bit exaggerated. The company reported a 40% year-over-year increase in revenue in the quarter, to $ 234.7 million. It is still a very impressive growth and there is probably more where it came from. Okta management said that fiscal year 2022 revenue will increase 30% at the upper limit of the guidance.
Investors are also nervous that Okta has just spent $ 6.5 billion to buy the cloud identity startup Auth0. But the acquisition will help Okta expand its identity management business to new platforms and services it currently does not reach. Sure, it’s a huge sum of money to spend, but it should help the company to further explore the $ 55 billion AMI market.
If investors step back for a moment and stop looking at short-term market volatility, they will see that Okta had a fantastic year in fiscal year 2021 and is still poised for further growth next year. In addition, the company’s latest acquisition is expected to boost Okta’s position in the rapidly growing IAM market and help the company stay ahead of its competition.
That is why, for long-term investors, the recent drop in Okta’s share price looks like a great opportunity to acquire some shares.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.