Over the past three months, the SPDR S&P 500 ETF Trust has increased just 2.6%. This moderate increase, however, has outpaced two of my favorite companies over the same time, which are down by 8% and 22%.
Both FIGS (FIGS 1.48%) and Riskified (RSKD -1.02%) have felt short-term pessimism from investors, but neither company's long-term investment thesis has been damaged. Because of this, I believe these companies merely trade at discounted prices, which is why I bought shares of both this month. Here's why you should consider doing the same.
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FIGS: One of the strongest brands in its chosen field
For a company that traded over 27 times sales at the time of its IPO, you would think that FIGS must be a software company, but it is actually a scrubs manufacturer. FIGS is taking a slightly different approach to making its scrubs -- it wants to ensure that its scrubs are the best on the market in terms of design, comfort, and usefulness.
FIGS realizes its customers wear scrubs for 40 hours (usually more) every week, so customers want their uniforms to be comfortable, good-looking, and durable. FIGS has delivered, and customers are happy about it. FIGS' net promoter score -- a score based on customer satisfaction on a scale from negative 100 to 100 -- is 81. A score above 70 is considered "world-class." Customers have been flocking to FIGS -- its customer count passed 1.6 million in the second quarter of 2021, growing 79% from the year-ago quarter -- with the average order value increasing 17% to $103.
Its strong brand has allowed the company to have strong pricing power -- its gross margin for Q2 2021 increased by 280 basis points to 73.3%, compared to Q2 2020, which is astounding for an apparel company. Not even Nike has these kinds of margins; its gross margin is 47%.
This extreme brand loyalty has allowed the company to report impressive financials and growth. Its revenue for Q2 2021 increased by 57.6% to $101.1 million, as compared to Q2 2020. However, net income was negative for Q2 2021 -- driven down by over $50 million in IPO expenses. The company is profitable without this IPO expense, with a Q2 adjusted net income of $14.3 million. The company has also generated nearly $32 million in free cash flow so far this year.
The company relies on its strong brand, and while that has benefited the company so far, if the tide turns on FIGS and its brand becomes less popular, that could hurt the business. There are various ways this could happen, whether it is through bad PR -- which it has struggled with before -- or rising competition. Competition hasn't been able to produce scrubs that are as good as FIGS' yet -- and its patents on its design and production process will make it hard for a competitor to do so, but if this changes, the FIGS brand could be damaged.
FIGS has taken the world by storm and amassed a loyal following. Its new product launches -- including its most recent launch of a jacket -- continue attracting customers, bringing them deeper into its product ecosystem. If it continues to make high-quality products that can be worn both in and out of the hospital, FIGS can likely maintain its brand loyalty and grow for many more years. With the company trading 28% off of its IPO valuation, today could be a great opportunity to buy in.
Riskified: Making e-commerce safer and easier for all
Riskified helps its customers detect e-commerce fraud while making sure the buying experience is not worsened. Before Riskified, online retailers trying to determine fraud would have a tough time, slowing its users down to ask them questions, diminishing the user experience. With Riskified, e-commerce companies do not have to slow their customers down and users have a better buying experience.
Riskified saves its customers lots of money -- reducing their fraud-related operating expenses by as much as 60% and increasing sales up to 20% -- while maintaining a high-quality user experience for buyers. This has led to GMV, revenue, and gross profit growth above 47% in Q2 2021 compared to the year-ago quarter. Revenue topped $55 million for Q2, and the faster growth in gross profit shows that its AI is becoming more accurate.
The company will have to continue to prove the effectiveness of its AI system to remain successful, but the strong success so far has led the company to reach near-profitability -- excluding an IPO-related income expense, the company's adjusted net income was $1.5 million. The company is trading at 18 times sales -- 45% off its all-time high -- allowing investors to get a huge discount on this successful company. Riskified has the opportunity to become a leading risk management system for e-commerce companies over the next decade.
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