In 2020, the U.S. stock market saw a flood of initial public offerings (IPOs) from businesses merging with a special purpose acquisition company (SPAC), and 2021 has already seen twice the number of last year's SPAC-based IPOs. Among this deluge, Doma Holdings (DOMA 4.48%) stands out as an intriguing investment opportunity.
Doma went public in July through a SPAC merger with Capitol Investment Corporation V. The company offers a technology platform that automates many of the complex processes involved in real estate transactions.
As such, Doma operates in the property technology space, often referred to as proptech. Proptech companies seek to disrupt the numerous antiquated procedures ingrained in the real estate industry.
So how is Doma faring in this endeavor? Let's take a look at the proptech expert's market opportunity and business performance to understand the long-term potential of investing in its stock.
Doma's market opportunity
According to the Wharton School, the real estate sector is one of the few in the U.S. "that has created immense wealth with little or no technology know-how and interest." The industry's slow adoption of technology creates an opportunity for Doma to improve and modernize real estate operations.
It currently focuses on the closing portion of real estate transactions, such as title, escrow, and settlement services. The company charges fees for these services, which is a typical industry practice, but Doma has an advantage: the ability to streamline the closing process through its cloud-based software platform, which uses capabilities such as data science and machine learning.
For example, Doma states its platform can reduce the typical three- to five-day title underwriting process to less than a minute. Its technology delivers efficiencies such as an automated title search, looking for red flags such as a lien, and surfacing this information to the relevant parties involved in the real estate transaction.
Doma estimates its area of focus has a total addressable market opportunity of $23 billion, and that number may grow in the future. According to the National Association of Realtors, sales of existing U.S. homes exceeded 5 million last year with a median home price of $296,700. Estimates forecast home sales to rise past 6 million properties through 2022.
Doma is seeing success gaining traction in the real estate industry. Its client list includes massive banks such as Chase and Wells Fargo. The booming revenue growth also illustrates the increasing industry adoption of the company's solutions.
In the second quarter, Doma generated $130 million in revenue, a 29% increase over the previous year. Through the first half of 2021, the company experienced a 51% jump in year-over-year revenue to $257.8 million compared to 2020's $171.2 million.
Additional growth lies ahead. At the end of the second quarter, Doma's underwriting services operated in 39 states while its title and escrow operations were in 22 states. The company is working to expand its services to the remainder of the U.S.
The company has set its eyes on even greater opportunities in the years ahead. Its platform is designed to extend beyond the closing portion of real estate transactions. Management intends to expand to other areas such as home appraisal and loan servicing processes.
Despite the growth, Doma is not perfect. The company had a net loss of $23.3 million in the second quarter. This is an increase from the prior year's net loss of $6.3 million.
The widening net loss isn't a red flag, however. Many tech companies operate at a loss for years to drive early growth before reaching profitability, and Doma is still a very young organization. The company was founded in 2016.
Moreover, Doma's balance sheet is healthy. Its second-quarter total assets of $434.5 million exceeded total liabilities of $256.9 million, and it had $158.5 million in cash and equivalents.
Is Doma stock a buy?
Doma is a company with many positives. It's tackling an area ripe for disruption, and its rising year-over-year revenue shows the company is finding success.
It anticipates 2021 full-year revenue of at least $475 million. This would represent the third consecutive year of revenue growth, following 2020's $410 million and 2019's $358 million. It might not be the kind of explosive growth seen in some young tech companies, but that's to be expected given the real estate industry's slow technology adoption.
Doma's financial health is solid, and it has plenty of opportunity for more revenue growth in the years ahead. These factors make this recent IPO stock a worthwhile investment.