The new year is underway, but the biggest story from 2020 is unfortunately still with us: COVID-19. With vaccines being deployed, there's at least a glimmer of hope, but for now, many of the same investing themes from last year will remain in effect.
E-commerce will be a force to be reckoned with for the foreseeable future, the rapid pace of new initial public offerings isn't losing any steam, and artificial intelligence (AI) is set to soar in importance in the decade ahead. With that in mind, I think investors should keep an eye on Alibaba Group Holding (NYSE:BABA), Opendoor Technologies (NASDAQ:OPEN), and Appian (NASDAQ:APPN) in January. Let's find out a bit more about these three companies and why they are stocks to watch in January.
1. Alibaba: China's Amazon comes under antitrust scrutiny
China's dominant force in e-commerce, along with other Chinese companies trading on U.S. markets, were under pressure in 2020 as Congress passed new legislation that could lead to the possible delisting of their stocks on American exchanges. Alibaba plays an important role in the Chinese economy, though, and its enduring double-digit-percentage growth ultimately left shareholders feeling chipper through the end of November.
Turns out the biggest dent Alibaba took would come on its own home turf. Chinese regulators pumped the brakes on the Ant Group IPO. Ant, which is majority-owned by Alibaba, has a stranglehold on digital payments on mainland China and a partnership handling payments for Alibaba. Until the IPO can proceed, there will be no new influx of fresh cash (which many investors were excited about) for the e-commerce giant.
A month later, Alibaba itself was also hit with regulator scrutiny, the word being the government is questioning Alibaba's monopolistic behavior in restricting sellers' ability to use other platforms.
As a result, Alibaba stock finished 2020 up only 10%, losing some 30% of its value in the final weeks of the year. Antitrust fever seems to be picking up momentum, with other tech giants like Facebook and Google parent Alphabet also getting lawsuits levied against them. But those two stocks barely registered a sneeze. Perhaps the reason is that charges against Facebook and Google were already expected.
There's some worry that China is a totally different story, with the government wielding power unlike in the U.S. It's simply too soon to tell how heavy-handed its treatment of Alibaba will be.
I think the drop in Alibaba's stock is overdone. The company is an integral part of the economy and its further development, as well as a key developer of technology in mainland China. Permanently crippling its superstar isn't in the best interests of the Chinese government. Thus, I plan on making another stock purchase in January, though I'll be on the lookout for signs that the suddenly gloomy mood is warranted.
2. Opendoor Technologies: Overpriced upstart or legit disruptor?
At the end of 2020, residential real estate platform Opendoor Technologies completed its IPO via merger with a special purpose acquisition company (SPAC) headed by former Facebook exec and venture capitalist Chamath Palihapitiya. By Dec. 21, the stock peaked at over $32. Since then, shares have lost about one-third of their value, but Opendoor is still valued at a market cap of over $12 billion as of this writing.
That's a steep price tag for a company that generated an adjusted gross profit of just $173 million through the first nine months of 2020, a 23% decrease from the same period in 2019. Gross profit rather than revenue is an important metric for Opendoor since it is a direct buyer and seller of homes (versus a traditional broker that never takes possession of the home). Gross profit measures what Opendoor keeps after it buys a home directly from a homeowner and later resells it.
This service isn't unique. Zillow Group (NASDAQ:Z) and Redfin (NASDAQ:RDFN) have also been disrupting the status quo in real estate with the same kind of service. But Opendoor is a pure-play in this space that aims to eliminate some of the complexity of buying and selling a home for consumers by offering a quick and easy way to offload a residence without the need for a real estate agent.
New technologies tend to be winner-take-all (like with the aforementioned antitrust situation with Alibaba and other tech giants). If Opendoor's tech is superior to similar offerings at Zillow and Redfin, a U.S. residential real estate market worth trillions of dollars a year could be ripe for the picking. Even a small gross profit margin on homes bought and sold could equate to billions of dollars Opendoor can capture in profit.
But that's a long way off, and I'm still unclear on whether Opendoor represents a big technological improvement over its closest peers. It has actually underperformed Zillow and Redfin in 2020, which have both grown their revenue and profitability metrics during the pandemic. Redfin specifically hauled in gross profit of $152 million through the first nine months of the year, a 46% increase year over year, and has a market cap of just over $7 billion.
So there's quite a discrepancy between the Redfin and Opendoor valuations. Either Redfin deserves to be valued at a much higher price to reflect its fast-growing operation, or initial investor enthusiasm regarding Opendoor is overdone. For now, I'm thinking the latter is the case, although I'm a Redfin shareholder and could be biased.
But I'm ready to be proved wrong by Opendoor. I'll be watching the stock and eagerly waiting for the company's first-ever quarterly report (on the fourth-quarter 2020 results) in January. Given the massive market opportunity, Opendoor is worthy of some attention.
3. Appian: What's next after an epic rise in the stock price?
The year 2020 was a big one for low-code software development firm Appian. The company kicked off the year by expanding its subscription platform's capabilities by making an AI and machine-learning acquisition. The going got rough when COVID-19 struck and many of the company's prospective new customers put spending on hold. But as 2020 dragged on, Appian's revenue growth was rekindled, with subscription revenue increasing at a 34% year-over-year pace in the third quarter.
What ensued was a bonkers 150% increase in share price during the final three months of the year, likely due to short-sellers closing their positions and sending the stock price higher. As of this writing, Appian is valued at a market cap of just over $11 billion, or 38 times trailing-12-month sales.
That's a steep price tag, even for a company like Appian that has in-demand tech services for organizations scrambling to keep up with necessary changes caused by the pandemic.
Share price aside, though, the quality of the company itself hasn't changed. Its low-code platform for fast and easy development of new applications continues to win new partnerships and new customer sign-ups. And the addition of automation functions gets the company into the nascent AI industry that's predicted to expand by double-digit percentages for the foreseeable future. Tech researcher IDC expects global AI spending alone to have increased by 12% in 2020 and sees it doubling from 2020 levels to reach $300 billion in 2024.
Thus, while there are legitimate questions about whether Appian's sky-high valuation will stick or not in the near term, the long-term potential looks greater than ever. Ahead of its final quarterly update of 2020, I'll be keeping an eye on shares and will be ready to buy more for the long haul if Appian reports a strong finish in the fourth quarter.