When it comes to investing in small up-and-coming businesses, picking just one or two usually won't suffice. Some won't survive, others will stagnate, and even those that do eventually provide big investment returns are incredibly volatile along the way. My picks last autumn (outlined in one piece in September and another in October) help illustrate the point.
Thus, when looking for tomorrow's greatest success stories, I take very small positions (usually half a percent or less of my portfolio value) in a handful of stocks and then add to the winners over time. For my latest batch of purchases in the wake of the coronavirus-fueled economic crisis, I scooped up shares of Livongo Health (LVGO), Cloudflare (NET 0.48%), Fastly (FSLY -1.55%), Repay Holdings (RPAY -4.38%), and VectoIQ Acquisition (VTIQ) (set to become Nikola).
The consumerization of healthcare is just beginning
A few years ago, I purchased a tiny but up-and-coming stock called Teladoc Health, thinking that medical care delivered via an internet connection had a bright future. Today, I'm more convinced than ever that technology is only just beginning to disrupt the industry and will continue to help consumers get the care they want delivered on their terms. To that end, I've had my eye on Livongo Health for a while and decided to finally pull the trigger after its first-quarter 2020 results.
The stock is up over 130% year to date and over 40% in the last month alone after reporting a 115% increase in revenue to start the year. Negative free cash flow (revenue minus cash operating and capital expenses) narrowed to $13.5 million compared with negative $26.8 million a year ago. Total clients at the end of March doubled year over year, and new services are just starting to fire up.
Livongo offers remote health diagnostic monitoring and runs the data through its AI and analytics software to provide real-time insights and actionable steps for its clients. The company started its program for those coping with diabetes, but other chronic conditions, including hypertension, weight management, and behavioral health, are being addressed now too. The list of individuals that could benefit numbers in the millions, giving this company a long roadmap for continued expansion as it disrupts the current standard of care.
Besides nearing breakeven, Livongo has ample liquidity to execute on its growth strategy. At the end of March 2020, the company had $368 million in cash and equivalents on the books. Though shares are sporting massive gains already this year, I think there could be plenty of upside left in the years to come.
The future internet being built behind the scenes
I'm going to take the next two, Cloudflare and Fastly, together. The small-ish companies made their public debuts in 2019 and have a fair amount of overlap. Both are cloud-based content delivery networks (CDNs). Cloudflare also provides various security services for businesses, entrepreneurs, and individual software developers. With the world getting shoved further down the digital path in recent months because of the economic lockdown, Cloudflare and Fastly have grown substantially as of late.
But why invest in these two stocks now, especially after a 66% and 105% return, respectively, year to date? Cloudflare and Fastly are still very small (with market caps of $8.6 billion and $4.0 billion) and are helping disrupt the internet itself. The world wide web was designed for the transmission of information, but nowadays, it has evolved into a means of communication and is used to deliver services. Organizations are increasingly relying on networks (public and private) for their day-to-day operations, something that has become a necessity in recent months. Cloudflare and Fastly were born in the cloud and are well suited to address these new needs. They are also leading the adoption of the network edge -- where data is getting pushed back out from a centrally located data center closer to the end user.
The result of this transformation in how we use the internet has meant double-digit growth for both companies, a trend that has only accelerated since the coronavirus lockdown. Specifically, Cloudflare's revenue increased 48% in the first quarter, and Fastly's 38%. In the years ahead, I think demand for the two companies' services will only increase as businesses put continuity plans in place to avoid any further disruption and upgrade their operations for the digital age. Cloudflare and Fastly both operate at a loss as they invest to maximize growth now, but they are well funded (cash and equivalents of $588 million and $117 million, respectively, and both are planning additional cash raises via convertible notes and equity offerings) to be able to keep the pedal to the metal.
Updating debt payments for the 21st century
Debit and credit card use is commonplace in everyday transactions in stores and online. But real-time digital payments are not so common when it comes to debt payments and business-to-business transactions. Use of checks and the legacy ACH digital money-movement system (which does not process payment in real time) has been stubbornly hanging on, but shelter-in-place orders are exposing the deficiencies of the old ways.
That's where Repay Holdings comes in. The digital payments technologist creates software and system integrations for debt servicers (auto loans, mortgages, etc.) and businesses to be able to accept real-time payments from customers. This is a tiny company, generating just $39.5 million in revenue and processing $3.8 billion in total card transactions in the first quarter. But the industries this fintech serves process over $1 trillion a year. Repay thus doesn't need to reel in every bank, credit union, and debt servicer in order to generate some serious upside.
It should be noted this is a risky play. Via several mergers and acquisitions, the small company had $246 million in debt and $33 million in cash at the end of March. Continued growth is a must to right-size those liabilities. And grow it has. Shares are up 57% so far this year as it increases the number of card transactions it processes, and Repay remains on the lookout for more mergers and acquisitions that will add to its bottom line. While the issuance of new stock dilutes existing shareholders, the fast-rising share price could be used to raise additional cash to acquire a high-growth peer or pay down debt.
With a massive addressable market that hasn't yet been cracked by digital payment processors, Repay is a risky play that nonetheless could be a big winner as the world adapts to the new post-pandemic reality.
A transportation stock for a new era
VectoIQ is a special-purpose acquisition entity that's been focused on investing in autonomous vehicle technology. But pending approval from shareholders on June 2, 2020, the company will merge with Nikola Motors, change its name to Nikola, and begin trading under the new symbol NKLA.
In anticipation of the tie-up, VectoIQ stock has skyrocketed 100% higher in the last month alone. What's the big deal? Nikola develops battery-electric vehicles (BEVs) and hydrogen fuel-cell electric vehicles (FCEV), and it already has over 14,000 orders for its FCEV semi-trucks. Should all the orders be fulfilled, it would represent some $10 billion in revenue over an expected two-and-a-half year production run. The obvious hope here among investors is that Nikola will emerge alongside Tesla as a future leader in transportation and logistics.
That's where the merger comes in. The transaction will issue new stock and combine proceeds with VectoIQ's cash in trust to raise $525 million. Those funds will be used to begin constructing Nikola's manufacturing facility southeast of Phoenix, Arizona, as well as building out its hydrogen fuel-cell stations to support the fleet of semis it will be making. An early customer for its BEVs and FCEVs is Budweiser parent Anheuser-Busch InBev.
But here's the catch: Should the combination of VectoIQ and Nikola go through (which it certainly seems it will), the new company doesn't expect to start generating revenue until next year. Managing cash burn and progress in delivering orders will be key, but this will be an incredibly volatile and speculative stock until those semis start rolling off the to-be-built assembly line. I'd advise keeping a position, if any, very small in the meantime. That advice holds for all of the stocks mentioned here.