The pandemic forced many people into their homes and online in 2020, and investors responded by flocking to technology stocks that they believed could excel during this difficult time.
And tech IPOs were no exception. Many of the biggest IPOs this year were in the tech sector, but some investors may be wondering if these new publicly traded companies are worth investing in for 2021. To help you find a handful of tech stocks that could be worth purchasing in the new year, we asked a few Motley Fool contributors for their top tech IPOs. They came back with Lemonade (LMND), nCino (NCNO), and Airbnb (ABNB).
Lemonade: A new approach to an old industry
Brian Withers (Lemonade): Lemonade went public on July 2, 2020 with a goal to be the "world's most loved insurance company." That may seem like a pipe dream, but once you learn how the company operates, it may not seem so far-fetched after all.
This start-up is taking a whole new approach to providing renters, home, and pet insurance. It's built on a "digital substrate," meaning that any task that can be automated by artificial intelligence, chatbots, or mobile technology is automated. You might think this would create a lousy customer experience, but it doesn't. Potential customers can get insurance quotes in an average of 90 seconds, policyholders can easily file claims with their mobile devices, and almost a third of claims get paid instantly. But there's even more to like about this disruptive tech company.
Lemonade is a public-benefit corporation, meaning that it is legally required to consider all stakeholders in the decision-making process. Given its status, the company has chosen not to profit when it has money left over after claims have been filed. Any proceeds not spent on claims at the end of the year are donated to a charity chosen by the policyholders. So far in 2020, the company has donated over $1 million to charitable causes selected by its customers.
How's this model working? The company is attracting customers at a high rate, many of whom have never owned insurance before. Last quarter, the company grew its customer base by 67% year over year to reach over 941,000. Customers are also paying 19% more on average year over year for policy coverage. Add these two growth rates together and its overall in force premiums (the amount policyholders are paying in aggregate annually) grew 99% year over year to $189 million. Its all-important gross loss ratio (the amounts paid out for claims over the total premiums collected) improved from 78% in the third quarter of 2019 to 72% in Q3 2020.
There's a lot to be excited about with this upstart, but it comes with some risk. Its 61 price-to-sales is valued more like hypergrowth phenom Zoom Video Communications (56 P/S) than its insurance provider peers such as Allstate (0.8 P/S). But with property, casualty, and life insurance premiums at around $5 trillion globally, this disruptive challenger has plenty of room to grow. Those investors looking to take part in this long-term growth story would do well by taking a small bite here and adding over time.
nCino: Banking on the digital transformation
Danny Vena (nCino): Cloud computing was already a part of everyday life before the pandemic, but since then adoption has accelerated. The combination of stay-at-home orders and remote work turned a luxury into a necessity, as it underscored the need to access systems from anywhere at any time. Banks were no different, and of those joining the digital revolution, many turned to nCino.
nCino is the leading global provider of cloud-native software for banks, credit unions, and other financial institutions, helping them conduct day-to-day operations in an increasingly digital environment. This includes new customer acquisition, account opening and creation, loan application and management, and more.
It may seem like something of a niche market, but nCino's customer list reads like a Who's Who in the banking industry. Bank of America, Barclays, and TD Bank -- home of TD Ameritrade -- are just a few of the headliners in a laundry list of more than 1,225 financial institutions. Yet with an estimated 28,000 potential customers worldwide, nCino has just begun to tap a vast and growing opportunity.
The biggest selling point for nCino's platform is the increased efficiency and lower costs banks gain by using its software. The company reports a 127% increase in account opening completion rates, a 40% decrease in the time necessary to close a loan, a 92% reduction in loan servicing costs, and a 54% decrease in policy exceptions. This all adds up a 22% overall increase in efficiency -- which leads to more robust profits.
This value proposition has attracted a growing number of banks and credit unions to nCino's platform. In its sophomore report as a public company, nCino generated impressive results. For the third quarter, it delivered revenue of $54 million, up 43% year over year, while subscription revenue of $43 million jumped 56%. nCino continues to tap global markets to fuel its growth, as international revenue grew 98%, but still represents just 12% of the total. This helps to illustrate the size of the opportunity that remains.
The company has yet to produce a profit, as its loss of $0.10 per share edged higher from $0.08 in the year-ago quarter. Perhaps more importantly, however, nCino is producing positive free cash flow, generating $21 million so far this year. This shows that the losses are the result of non-cash items like depreciation, so it's less of a concern.
What should have investors most excited, however, is the market opportunity that remains. For the year ended Jan. 31, 2020, nCino generated revenue of $138 million, which pales in comparison to management's estimate of a $10 billion addressable market.
Airbnb: An overnight IPO success
Chris Neiger (Airbnb): Airbnb went public in mid-December and shares more than doubled on its first day of trading. There's been a lot of hype surrounding Airbnb's IPO to be sure, but I think long-term investors may have a winner with this company.
I have to admit that I may be a little biased toward the idea of a company that allows you to stay nearly anywhere you want to. I used Airbnb to take my family on a four-month road trip across half the U.S. last year and the trip wouldn't have been possible without the company's vacation rental platform. I think that's one of the unique advantages that Airbnb has over its rivals -- it offers more homes, with simple booking, that you can't get anywhere else.
Like many companies, Airbnb has suffered during the pandemic as revenue fell 32% in the first nine months of 2020 and the company laid off about 25% of its employees. But Airbnb could see revenue bounce back in 2021 and beyond as more people receive the coronavirus vaccine and return to traveling.
We're still in the early stages of the home-sharing market and Airbnb is the clear leader in this space. The underlying strength of the company's business can be found in its 2019 gross bookings, which were up 29%, and its 32% increase in revenue.
Once the pandemic is a thing of the past I think Airbnb will be perfectly positioned to ramp up growth once again. And even if it takes longer to emerge from the pandemic, Airbnb is tapping into trends, like working from home, that will help drive the company's growth. Once traveling returns, and it will return, Airbnb's business could go gangbusters.