2021 has been a wild period for growth stocks. Some names are now (as of December) in the midst of a third pullback this past year and down double-digit percentages from their all-time highs. Among the hardest-hit stocks are recent IPOs, which tend to be especially volatile in their first year as publicly-traded companies.
However, the recent sell-off looks like another fantastic buying opportunity for investors with a long-term focus (at least a few years but the more, the better). Three IPOs from 2021 that deserve to be on your radar for 2022 are DigitalOcean (DOCN 0.06%), Coinbase Global (COIN 0.80%), and SoFi Technologies (SOFI -2.95%).
A decade of rapid cloud computing adoption lies ahead
DigitalOcean, the cloud computing platform purpose-built for small- and mid-sized businesses and start-ups, completed its IPO in March 2021 and raised about $775 million in fresh cash in the process. As of this writing, the small cloud technologist's shares are up 57% from their IPO price, despite being down 45% from all-time highs reached last month.
At this point, DigitalOcean now trades at the same level as before its fantastic third-quarter earnings update. Specifically, shares trade for about 17 times trailing 12-month revenue, and though profits are being plowed back into the business to promote expansion, DigitalOcean is nevertheless free-cash-flow positive.
Given that revenue increased 37% year over year in the third quarter to $111 million, and adjusted EBTIDA profit margin is on track to be a very healthy 30% for the full year, this 2021 IPO is a fantastic long-term value. Looking a couple of years down the road, the company has its sights on maintaining 30% annual sales growth, putting it on track for $1 billion of revenue by 2024. With developers and businesses alike flocking to highly efficient cloud-based operations, DigitalOcean should be a growth story throughout this decade.
Of course, there is a worry the public cloud giants like Amazon, Microsoft, and Alphabet could steamroll DigitalOcean, thus the reasonable-ish valuation compared to other small, high-growth cloud firms. But the big three in the public cloud also offer services to small- and mid-sized businesses, and to date, they have been unable to crowd out this small upstart. I remain optimistic about DigitalOcean's prospects.
Leading the charge in the cryptocurrency economy
Cloud and edge computing are the current driving force behind the development of the internet, and in many ways, cryptocurrency is a possible next wave of further decentralization of the World Wide Web. Owners of crypto hold more than just a digital currency. Ownership of some of these tokens grants the holder participation in blockchain computing, making their device part of a global network of individual computers that combine to form a type of supercomputer (like data centers, the computing unit of the cloud, are supercomputers today).
Of course, the crypto movement has a long way to go before it matures into this long-term decentralized vision of the digital economy. But until then, crypto trading and related services are booming. One of the leading exchanges (measured by trading volume) is Coinbase, which began trading in April 2021 following a direct listing. This wasn't a traditional IPO as Coinbase didn't need to raise capital from investors by issuing new stock. Nevertheless, it has been a tumultuous ride since then. Coinbase is down 26% from the closing price on its first day of trading.
There's a lot of debate as to whether the company's revenue growth (up 330% year over year to $1.24 billion in the third quarter) is sustainable -- or if sales might crater should the extremely volatile cryptocurrency market decide to crash. There's also lots of competition, and given the adolescence of the crypto industry overall, things will rapidly evolve with blockchain technology in the coming years. Coinbase's current leadership position could quickly falter if it doesn't stay abreast of these challenges (for example, the development of the metaverse that has gone viral recently).
However, at a respective nine and 22 times trailing 12-month sales and earnings, Coinbase's incredible growth can be purchased at a relative discount -- assuming its business and the crypto economy continue to expand at even a modest pace in the coming years. I'm ready to start dipping my toe in the water at this point with Coinbase stock.
A top-growing fintech firm
Digital lender and fintech outfit SoFi Technologies was another non-traditional IPO. The company went public via SPAC merger in June 2021, raising some $2.4 billion in cash in the process to help it pursue rapid growth. It's been a gut-wrenching ride ever since. The stock has surged 90% from its value at the start of 2021 (when it was just an SPAC stock before the official merger) three separate times, only to come crashing back down after each round of gains. As of this writing, shares are up just 20% year to date.
Not that these crashes are indicative of something seriously wrong with the business itself. Member accounts continued to nearly double year over year in the third quarter, and revenue was up 35% to $272 million. So what gives?
Sales growth did decelerate from previous quarters, and SoFi is still unprofitable. It generated a net loss of $30 million during the quarter (although it was profitable for the fifth quarter in a row based on adjusted EBITDA).
SoFi should continue to grow for many years to come, though. Its one-stop app for a wide range of digital banking, lending, and investing capabilities is clearly resonating among younger consumers, and its Galileo platform is helping other fintech start-ups build new digital-native services, a real differentiator. The company had $854 million in cash and short-term equivalents on balance at the end of September and subsequently raised another $95 million in cash proceeds when it redeemed warrants on its stock in December (related to the initial SPAC merger).
Trading at 11.7 times trailing 12-month sales, SoFi is far from being a cheap bank stock. But the company is much more than a traditional bank, efficiently combining lots of mobile-first financial services in one convenient place and riding incredible new customer momentum as a result. I plan on adding a little more to my small position for the start of 2022.