When investing in stocks, investors should seek great businesses with a history of execution, or at least solid growth potential. A stock priced at $1,000 per share could be a bargain compared to one priced at $10 per share. Nonetheless, less mature businesses -- and those with greater growth potential -- tend to have more "affordable" share prices.
We recently asked three contributors at The Motley Fool for a promising stock on their radar that's trading at less than $20. Here's why they chose enzyme engineer Codexis (CDXS -6.28%), software-as-a-service (SaaS) business Zuora (ZUO -8.57%), and up-and-coming apparel company Stitch Fix (SFIX -15.61%).
Results pending, but a promising biotech stock
Maxx Chatsko (Codexis): Investor enthusiasm for Codexis has waned a bit in the last year as everyone (myself included) waits to see more tangible signs that the business is executing on its long-term plans. But if the enzyme engineering leader delivers, then it'll easily be valued well above its current $800 million market cap or recent $1.2 billion peak.
Codexis is a biotech company, although the word "biotech" gets tossed around a bit too casually these days. The company wields a technology platform that allows it to engineer enzymes -- complex biological molecules that drive chemical reactions at the cellular level, ranging from DNA repair to insulin production -- for a variety of applications outside of living cells.
The platform's largest customer group comprises pharmaceutical drug manufacturers, which use enzymes to reduce process steps, eliminate toxic waste, and increase yield. But enzymes can also be used to manufacture food ingredients and industrial chemicals, in leather making and metalworking, and to power clinical diagnostics. Codexis is even exploring the use of engineered enzymes as therapeutic medicines and has secured eight-figure licensing deals for its software platform with many of the world's largest pharmaceutical companies.
Put another way, the business has many opportunities on the horizon -- it just has to execute. Codexis entered the second half of 2019 with $93 million in cash, which will certainly help, but internal efforts to outrun customer churn haven't been easy to validate for external observers. Product revenue -- the most important source of growth and future profits -- is expected to barely budge in 2019 compared to the previous two years.
That said, the opportunities ahead are intriguing for the $800 million company. If Codexis can leverage its new diversity of customers as expected and commercialize new products to jump-start product revenue growth, then investors with a long-term mindset should be rewarded.
A beaten-down SaaS stock
Brian Feroldi (Zuora): Tech stocks have performed very well over the last few years, but Zuora hasn't participated in the rally. That's because management recently pulled back on its full-year revenue guidance. Wall Street wasn't happy. Zuora's stock is currently hovering near an all-time low, and it's well under $20 per share. That could mean it's a great time to get in.
Zuora offers cloud-based billing solutions that help companies make the switch from one-time product sale to a subscription business model. That might sound like a niche offering, but scores of consumer-facing businesses are interested in making the switch. Subscription sales have numerous advantages over one-time purchases. Subscriptions feature lower up-front costs, which makes it easier to get the customer to say yes. In exchange, the seller benefits from a predictable stream of recurring revenue and gets to build a relationship with the customer. Subscription sales also provide opportunities to upsell and can create high switching costs.
These benefits make it easy to understand why the demand for Zuora's products has taken off. What's more, Zuora's is doing a great job at convincing its existing customers to spend more each year. Last quarter, the company's dollar-based retention rate was 110%, which means that its revenue would have grown 10% if it didn't add a single new customer.
So why did management dial back its full-year revenue guidance? Founder and CEO Tien Tzou said, "[W]e are making changes to our sales approach to scale the business to the next level, which tempers our expectations for the remainder of the year."
It's understandable why this comment spooked Wall Street, but the company still expects to grow its top line at a double-digit rate in 2019. With the stock now trading at the lowest price-to-sales ratio since it became public, shares could be viewed as a bargain at these levels if management's changes help drive the company's next phase of growth.
An apparel upstart on sale
Demitri Kalogeropoulos (Stitch Fix): For around $20 a share right now, growth-focused investors can grab shares of Stitch Fix and own a stake in what could be an impressive, long-run expansion story. The e-commerce apparel specialist's stock has been pushed down to that level from over $30 in late June, mainly thanks to worries about competitors like Amazon.com (AMZN -3.21%) arresting its market-share gains.
There's no evidence of that happening today. In fact, Stitch Fix reported rising renewal rates and increased revenue per active client in the second quarter. Those successes suggest that CEO Katrina Lake and her team might have plenty of room to grow as they expand their platform into menswear and kids' clothing, and over to new geographies including the U.K.
The stock's recent bumpiness, with shares up almost 40% in June and then down 19% in July, illustrates just how unsettled Wall Street is in trying to value this young business. But investors can take advantage of those swings with an eye toward holding over the long term to see just how far Stitch Fix's data-driven approach to apparel matching can go on the global clothes shopping stage.