After an epic year in 2020, high-flying tech stocks continue to trade down to kick off 2021. Rising interest rates are to blame. However, this situation doesn't reduce the actual growth prospects for these businesses. For investors eyeing the long-term potential, the recent sell-off spells opportunity. To that end, three contributors recently purchased PayPal Holdings (PYPL -1.68%), Lemonade (LMND 8.80%), and TS Innovation Acquisitions (TSIA) during the downturn. Here's why.

Love lost for the future of financial services, but for the wrong reasons

Nicholas Rossolillo (PayPal Holdings): PayPal had a great year last year. Thanks to booming e-commerce and rapid adoption of its mobile money movement app, Venmo, among consumers and merchants alike, the company notched a 22% increase in revenue and a 48% increase in free cash flow in 2020. To illustrate how massive this fintech ecosystem has gotten, total payment volume processed on a PayPal service was nearly $1 trillion last year.  

PayPal's growth story is far from finished, though. It expects payment volume to increase in the high 20% range this year. It's also making strategic bets on new forms of digital payments, blockchain technology, and cryptocurrency trading -- recently announcing the acquisition of cryptocurrency infrastructure start-up Curv. In spite of all this momentum, PayPal was caught up in the tech stock sell-off, at one point falling some 30% from all-time highs. Adding to the pain was news that funds managed by prominent institutional investor Cathie Wood sold some shares (perhaps due to short-term client liquidation of funds, or perhaps just to rebalance after PayPal stock more than doubled in value since the beginning of 2020).  

Either way, I was grateful for the precipitous fall. PayPal is becoming a top-of-mind application for a new generation of consumers shopping for modern financial services. It's a digital payments company, its apps double as a basic checking account, it offers short-term lending products and debit and credit cards linked to its digital wallets. And businesses are making use of PayPal like never before, too, adding it as an accepted payment option and even incorporating it into in-person payments with touchless transactions via a smartphone. 

The sky's the limit for PayPal, and though it's trading for a hefty 58 times trailing-12-month free cash flow as of this writing, it looks like a long-term value if its rapid rate of expansion continues like it predicts it will. So I went shopping in the midst of the pullback, and plan to buy more in the month ahead.

A laptop, smartphone, and cup of coffee sitting on a table in front of a window.

Image source: Getty Images.

Lemonade is a tasty treat

Anders Bylund (Lemonade): Insurance technology expert Lemonade caught my eye several months ago. When the stock took a dive at the end of February, I couldn't help myself. It was time to add this game-changing growth stock to my portfolio.

Lemonade is disrupting the insurance industry with the help of artificial intelligence and deep data analysis. Traditional insurance policies typically require assistance from highly trained humans in many ways, starting with risk analysis in the signup process and ending with claim management and payout adjustments. All of these steps are automated to the hilt with Lemonade, resulting in a pleasant policy-starting experience and lower operating costs. The company passes the savings on to its customers in the form of lower insurance premiums, and annual profits are capped at 20% of incoming policy premiums. The rest is donated to charity and Lemonade's customers have a say in which non-profit organizations will receive the surplus cash.

That's a disruptive business model. I wouldn't be surprised if other insurance companies find themselves forced to copy many key parts of Lemonade's disruptive strategy, which gives the company a first-mover advantage in a truly massive market. The American insurance industry is a trillion-dollar annual market and I don't see why Lemonade would limit its ambition to North America in the end. The company has barely scratched the surface of this enormous opportunity so far with trailing sales of just $94 million.

I can't wait to see Lemonade earning a much larger slice of the domestic insurance market, one state at a time across a growing selection of insurance types. The stock is also found in Wall Street's proverbial bargain bin, trading nearly 50% below January's 52-week highs. I don't get excited about insurance companies too often but I'm drooling over Lemonade's stock right now.

This early stage SaaS has caught my eye -- and Chamath Palihabitiya's

Billy Duberstein (TS Innovation Acquisitions): TS Innovation Acquisitions is a new SPAC that has announced but not yet closed its merger with property technology company Latch. Like most new IPOs and SPACs, Latch's potential profits are far off in the future. In fact, its revenue this year is only projected to reach $18 million. So in this period of rising long-term interest rates and concerns over inflation, these types of early stage stocks have declined. TSIA itself has fallen about 35% from its recent highs, so I added to my position. 

Why Latch? When looking at relatively young growth stocks, it's hard to gauge them based on their current valuations. Instead, I look at just a few important criteria: the business model and potential competitive advantage, the management team, and the total addressable market.

Latch stands out on all three fronts. In terms of its business model and strategy, Latch's product suite integrates software and hardware, aiming to become the "operating system" for modern residential apartment buildings. Since its customers are landlords that charge monthly rent, Latch charges customers a recurring subscription for its software-as-a-service products, along with one-off hardware purchases. Most customers sign a letter of intent two years before the building is completed, and usual software contract terms are six years, with most customers paying it all upfront. That visibility is why management is confident it can grow revenue 50-fold to $877 million by 2025.

Latch's management and SPAC sponsors are also impressive. Founder and CEO Luke Schoenfelder has prior experience at Apple and has founded companies before Latch. He also impressed in this recent interview with my colleague Matthew Frankel. Latch's SPAC sponsors also lend confidence. Tishman Speyer is a world-class global real estate developer and a happy Latch customer, which can give Latch credibility and global access it wouldn't otherwise have as a stand-alone start-up. Additionally, a long list of reputable investment funds participated in the PIPE portion (private investment in public equity) of the SPAC, including Chamath Palihapitiya, who called Latch the best SaaS company he's ever seen

Finally, Latch's potential market is massive, with 32 million apartment units and 15 million single family home rental units in the U.S., along with 93 million apartment units in Europe. That could equate to a $54 billion U.S. market and a $90 billion European market potential. Schoenfelder has also intimated Latch aims to get into other types of buildings as well, such as commercial real estate, and expand the number of products it sells over time.

All in all, Latch checks all of the big boxes I look for in a somewhat risky, early-stage growth company, so I was happy to add some shares in the recent tech sell-off.