Initial public offerings (IPOs) can be an alluring way to buy shares of a company. The media hype around companies going public, particularly tech stocks, adds to the feeling that buying shares on the first day of trading could bring inventors piles of cash.
In reality, IPOs can be very risky for investors. But that doesn't mean that the companies that have recently gone public won't make great long-term investments. To help you find some recently minted publicly traded companies that could help you build wealth for years to come, we asked a few Motley Fool contributors for their top picks. They came back with nCino (NASDAQ:NCNO), Lemonade (NYSE:LMND), and Snowflake (NYSE:SNOW). Here's why.
You can take this IPO to the bank
Danny Vena (nCino): Buying into an IPO can be fraught with risk, which is why many in-the-know investors generally avoid new issues. There are several factors that make buying into these fledgling companies more risky. One is the fact that individual investors can rarely get in at the IPO price, which is reserved for investment banks and institutional investors. Another is that these companies have a limited track record and no history of operating under the public gaze.
That said, there are newly minted companies out there that boast financial metrics that will help minimize the potential for failure. nCino (NASDAQ:NCNO) is one such enterprise.
nCino is a software-as-a-service (SaaS) company that provides cloud-based tools for banks and other financial institutions. Its platform helps onboard new customers, open accounts, make loans, and manage the entire lifecycle of the loan process. The platform uses data analytics, artificial intelligence, and machine learning to make these tasks more efficient while also managing regulatory compliance. nCino provides these services to banks and credit unions of all sizes and complexities, allowing its customers to access the platform anytime, anywhere, from any internet-enabled device.
The company counts more than 1,100 financial institutions as customers, including Bank of America (NYSE: BAC), Barclays (NYSE: BCS), and TD Bank (NYSE: TD) -- home of TD Ameritrade, among others.
The writing was on the wall when nCino went public in mid-July. After initially pricing the stock in a range of $22 to $24, it was increased from $28 to $29 just days later in the face of overwhelming demand. On the night before its debut, the price was boosted again to $31, and even that wasn't enough. When trading opened, the stock jumped out of the gate and never looked back, ending the day at $91.59, up 195%.
What had investors flocking to nCino's offering? For the year ended Jan. 31, 2020, revenue of $138 million grew 57% year over year, accelerating from 51% growth in the prior year. At the same time, subscription revenue grew by 60%, down slightly from 69% in the prior year. The company maintained its impressive growth during the three months ended April 30, with revenue of $44.7 million, up 50%, while subscription revenue jumped to 65%. Like many SaaS companies, nCino has yet to generate a profit, as it sprints to gain market share.
In its freshman quarter as a public company, nCino reported record results, as revenue of $48.8 million climbed 52% year over year, while subscription revenue of $39.4 million increased 70%. At the same time, the company's non-GAAP (adjusted) loss per share of $0.01 improved dramatically for a loss of $0.08 in the prior-year quarter.
While there are no guarantees that nCino will continue its winning ways, there are a couple of things working in its favor. Banks would be loath to change software platforms once they've been chosen due to the high switching costs. Additionally, the rapidly increasing subscriber growth will help ensure high recurring revenue.
It also doesn't hurt that nCino has $91 million in cash on its balance sheet and no debt.
Getting in on a sweet opportunity
Brian Withers (Lemonade): Lemonade is upending the insurance industry with a company built from scratch on technology and an "un-conflicted business model." It offers insurance policies for renters and homeowners in addition to pet health insurance, and relies on customer-friendly artificial intelligence chat engines to power many of its customer interactions. Between its powerful cloud software, machine-learning capabilities, and use of mobile phone technology, the company is aiming for "zero paperwork and instant everything." Between its high-tech foundation, lower costs, and status as a public benefit corporation, it has all the makings of being a much bigger player in this $5 trillion industry.
Founded in 2015 and IPO'd in June 2020, the company has only one quarter under its belt as a public company. As an early-stage tech start-up, it's growing significantly but losing money. Last quarter, customers increased 84% year over year to over 814,000, and premiums collected per customer increased 17% over the same period. This drove a 115% increase in its "in force premiums" to $155 million, which are committed premiums on the books as measured at the end of the period. Lemonade takes a fixed 25% of its total premiums collected as revenues, resulting in year-over-year top-line gains of 117% to $30 million. For the quarter, it recorded a $21 million loss.
It has a strong balance sheet with $295 million in cash, cash equivalents, restricted cash, and investments but no debt. Its cash burn, as measured by cash used in operating activities, was $35 million for the quarter, giving the company ample runway to continue investing in growth.
As an insurance company, one of the most important metrics is how much money the company keeps after paying customer claims. Lemonade measures this by its gross loss ratio, which compares the claim payouts as a percentage of the premiums it collects. The trend has been steadily improving over time and is now in its target range.
As the company continues to operate and grow its customer base, it will collect more data to enable the company to be even better informed about the dynamics of this important metric. Its goal is to keep this number between 60% to 70%.
If you are interested in this high-growth disrupter, you need to remember this is still a small company and size your position accordingly. As of June 30, 2020, it had 381 employees and less than $100 million in trailing twelve-month revenues. But as CEO and co-founder Daniel Schreiber explained on the most recent earnings call, its small size is a benefit. He stated: "The biggest and best and most efficient insurance companies in America have about a ratio of 400 customers to 1 employee ... And Lemonade is over 2,000 to 1." This gives them a tremendous strategic advantage over industry incumbents.
I'm excited about what Lemonade can become over the long term and purchased a starter position last week. Maybe you'd like to add some of this tasty treat to your portfolio too?
This tech stock isn't melting away any time soon
Chris Neiger (Snowflake): Many tech investors have no doubt heard the buzz surrounding Snowflake's mid-September IPO. Warren Buffett's Berkshire Hathaway has already invested in the cloud-based data platform company, as has Salesforce.com, which has helped the young company gain a lot of tech street cred very quickly.
But tech investors don't have to take Buffett's word for it, because Snowflake is already putting up some very impressive figures. Sales grew 173% in the fiscal year ending Jan. 31, 2020 and increased 133% in the first six months of 2020. Snowflake is also growing its customer base at a rapid pace, doubling its customer count over the past year. And it's clear that those customers are sticking with Snowflake and spending more money because the company's net revenue retention rate is 158%.
To say that Snowflake's IPO was a huge success would be an understatement. The company's shares were priced at $120 the night before going public but shot up to $245 when trading began in the morning and closed around $254.
So have investors who didn't buy Snowflake's stock on the first day of trading already missed out? Probably not. While Snowflake's stock is expensive right now -- with its current $252 per share price equaling a staggering 120 times sales -- investors need to keep a very long-term perspective in mind with this company. Snowflake is getting in on the ground floor of the expanding data-cloud market in which the company believes it has an $81 billion addressable market.
With its early moves, Snowflake could prove to be a leader in this industry over the coming years and bring lots of value for its investors along the way. Companies of all sizes are looking for ways to make good use of the piles of data they've been collecting for years, and Snowflake is helping them do that.
There's no denying that Snowflake's stock is expensive right now, but if your investing timeline is measured in years (and it should be) instead of months, then Snowflake could end up being a great addition to your tech-stock portfolio.